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Games people play with cash flow

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Re: Games people play with cash flow

#101

Post by sushisource »

toast0 wrote: post #30
bob33212 wrote: post #21

Earlier quoted context omitted.

After a "collapse" you are still left with mindshare and a market. If you increase prices by 30% you'll still be the largest player. Maybe later investors are not making returns but you are not going bankrupt.

The thing is, if you have lots of takers for dollars for 80 cents, that doesn't tell you very much about how many takers you'll have for dollars for $1.04. If you charge too much for food delivery, you won't have very many customers. How much is too much, and does it leave you a profit is the big question. maybe they can make it work, but probably not in a lot of markets.

In my experience as demand has increased due to the pandemic, prices are reaching the point where I'm not willing to pay them, and I make good money like most people on this site.

If that's any indication of what's to come when they need to stop bleeding cash... not looking great.

Re: Games people play with cash flow

#102

Post by CallMeJim »

ihatethissite wrote: post #18

The author creates a false dichotomy when they write that business is either about making profit or managing cash flow. Making a profit requires cash flow management, but managing cash flow does not require making a profit. This article does talk about managing cash flows in a way that involves never making a profit. First, and tangentially, it's interesting that real estate developers do this all the time. Second, i…

> Making a profit requires cash flow management, but managing cash flow does not require making a profit. This article does talk about managing cash flows in a way that involves never making a profit.

Isn't the exact opposite true?

I work with businesses which import goods and sell them. The vast majority of these make a steady profit without any thought to cash flow management. Accounts receivable are a mess, payment terms are long and they have a lot of cash tied up in working capital - but they are making enough of a profit to make up for this.

In contrast, you can stay in business making a loss with clever cash-flow management, but not forever. Equity will decrease year over year, and new sources of cash (lending, selling shares) need to be found to finance the continued operation of the business.

Re: Games people play with cash flow

#103

Post by ameetgaitonde »

highfrequency wrote: post #94

Could someone explain the core example about prepaying restaurant vendors? (Kokonas again): That’s what I said! I went, “I’ll pay you $20 if you tell me why.” And he said, “Well, it’s very simple. I have to slaughter the cows, then I put the beef to dry. For the first 35 days I can sell it. After 35 days there’s only a handful of places that would buy it, after 60 days, I sell it $1 a pound for dog food.” So his wast…

Part of the reason is because it's a set order. Consider that in pricing his beef normally, the vendor has to account for three things:

1. Beef that sells within 35 days at regular price 2. Beef that sells within 60 days as a discounted price 3. Beef that sells after 60 days for a loss.

The beef's regular price has to be somewhat higher than in an efficient market because some of it will be sold at a loss.

Getting an order for a set amount per week allows him to disregard the losses he normally has from beef that has to be sold for dog food, because the purchaser is guaranteeing their quantity, smoothing their expectations on how much beef to purchase in the future.

It's possible that at $18 a pound, without any waste, he's making the same margins/profit as he would at $34 with some waste.

Re: Games people play with cash flow

#104

Post by nraynaud »

Funny, I had a boss do the converse. We were a very young company with zero customer, and we had a small net 30 bill to pay. The boss said: I have to put a reminder to pay it. Well, without any hope of earning money in the mean time, there is no point in trying to optimize the cash flow pay now and be done with it. Free your brain and don’t adopt complex behavior if the reason is not here.

Re: Games people play with cash flow

#105

Post by highfrequency »

ameetgaitonde wrote: post #103
highfrequency wrote: post #94

Could someone explain the core example about prepaying restaurant vendors? (Kokonas again): That’s what I said! I went, “I’ll pay you $20 if you tell me why.” And he said, “Well, it’s very simple. I have to slaughter the cows, then I put the beef to dry. For the first 35 days I can sell it. After 35 days there’s only a handful of places that would buy it, after 60 days, I sell it $1 a pound for dog food.” So his wast…

Part of the reason is because it's a set order. Consider that in pricing his beef normally, the vendor has to account for three things: 1. Beef that sells within 35 days at regular price 2. Beef that sells within 60 days as a discounted price 3. Beef that sells after 60 days for a loss. The beef's regular price has to be somewhat higher than in an efficient market because some of it will be sold at a loss. Getting an…

Right. So the value add here is not actually about moving cash flow forward in time through reservation deposits, but rather just having a predetermined order size. Am I misunderstanding, or is this a complete non-example for the point of the article?

Re: Games people play with cash flow

#106

Post by bigiain »

highfrequency wrote: post #105
ameetgaitonde wrote: post #103

Earlier quoted context omitted.

Part of the reason is because it's a set order. Consider that in pricing his beef normally, the vendor has to account for three things: 1. Beef that sells within 35 days at regular price 2. Beef that sells within 60 days as a discounted price 3. Beef that sells after 60 days for a loss. The beef's regular price has to be somewhat higher than in an efficient market because some of it will be sold at a loss. Getting an…

Right. So the value add here is not actually about moving cash flow forward in time through reservation deposits, but rather just having a predetermined order size. Am I misunderstanding, or is this a complete non-example for the point of the article?

I'd guess in the restaurant game, net-120 also has the risk of the restaurant going out of business, so any "predetermined order sizes" are less than guaranteed (a very long way from the guarantee the pre paying gives).

By the restauranteur having reservation deposits which allow them to offer to pay upfront (moving that cash flow 120 days earlier) - the wholesaler reduces both uncertainty (I wonder how much beef I need to order and how much extra I should add that I'll later sell for a loss to make sure I don't run out if sales increase?) as well as risk (What if this restaurant shuts down owing me for 4 months worth of beef?)

Re: Games people play with cash flow

#107

Post by shadowsun7 »

highfrequency wrote: post #105
ameetgaitonde wrote: post #103

Earlier quoted context omitted.

Part of the reason is because it's a set order. Consider that in pricing his beef normally, the vendor has to account for three things: 1. Beef that sells within 35 days at regular price 2. Beef that sells within 60 days as a discounted price 3. Beef that sells after 60 days for a loss. The beef's regular price has to be somewhat higher than in an efficient market because some of it will be sold at a loss. Getting an…

Right. So the value add here is not actually about moving cash flow forward in time through reservation deposits, but rather just having a predetermined order size. Am I misunderstanding, or is this a complete non-example for the point of the article?

The point is that improving the cash position of the restaurant (traditionally a low float, low margin business), by moving customers payments forwards in time, allows them to improve their margins by pre-paying their food vendors. This is in contrast to the example right before, where speedy deliveries from a lean manufacturer motivates downstream distributors to switch suppliers, despite taking a margin hit, because they can improve their cash position by doing so.

Re: Games people play with cash flow

#108

Post by martinald »

bigiain wrote: post #106
highfrequency wrote: post #105

Earlier quoted context omitted.

Right. So the value add here is not actually about moving cash flow forward in time through reservation deposits, but rather just having a predetermined order size. Am I misunderstanding, or is this a complete non-example for the point of the article?

I'd guess in the restaurant game, net-120 also has the risk of the restaurant going out of business, so any "predetermined order sizes" are less than guaranteed (a very long way from the guarantee the pre paying gives). By the restauranteur having reservation deposits which allow them to offer to pay upfront (moving that cash flow 120 days earlier) - the wholesaler reduces both uncertainty (I wonder how much beef I n…

This doesn't really add up though because in reality the butcher would just use invoice finance to get the money ahead of time at a way lower cost than a 50% discount he's offering, which would probably include some insurance if the restaurant went under. It doesn't make sense. Invoice finance might cost 5-15% of the invoice. Why wouldn't you do that rather than giving customers 50% off? I can get a small discount but half price doesn't seem realistic.

Re: Games people play with cash flow

#110

Post by chii »

shadowsun7 wrote: post #107
highfrequency wrote: post #105

Earlier quoted context omitted.

Right. So the value add here is not actually about moving cash flow forward in time through reservation deposits, but rather just having a predetermined order size. Am I misunderstanding, or is this a complete non-example for the point of the article?

The point is that improving the cash position of the restaurant (traditionally a low float, low margin business), by moving customers payments forwards in time, allows them to improve their margins by pre-paying their food vendors. This is in contrast to the example right before, where speedy deliveries from a lean manufacturer motivates downstream distributors to switch suppliers, despite taking a margin hit, becaus…

So why isn't there a futures market for selling these meats?

The farmer/producer would like certainty of sale, at a certainty of price. This is exactly what a futures option gives them - they can offload the risk of price fluctuations (and demand reduction/changes) in the future, and someone else can speculate on this (and make more profit, or loss).

It seems stupid for a farmer/producer to take on this risk, rather than sell these futures.

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