When Delaying Purchases Can Boost Cash Flow
by Mark Henricks
As they say, you have to spend money to make money. But you don't always need to spend your business's money right away. Sometimes delaying a purchase can help significantly improve your cash flow. Whether you should stock up on inventory at a good price or delay investing in new technology, we'll talk about the factors you should keep in mind when you're thinking about how delaying purchases can boost cash flow for your business.
Consider the Technology
There are goods like IT equipment that can reliably be expected to show significant price declines for equivalent products, even over fairly short time spans. There's often a significant difference in price between brand-new technology like computers and smart phones, and somewhat less-advanced equipment that, while still relatively new, has already been around for a few months. The same goes with most IT software and hardware. If your business can wait a few months, you may be able to buy the technology you need at a discount in the future—while conserving cash for other purposes in the meantime.
Other goods and services may also experience fairly predictable price declines. Energy, for example, is an expense that can run very high for some businesses. The economic importance of fuel and other energy products and their frequent fluctuations in price on the open market means sophisticated forecasts of future price direction are readily available. When fuel prices are trending down, delaying signing a long-term fuel supply contract could mean getting more gas for your buck later on.
Similar forecasts can be obtained for rent, buildings, labor, and many other sorts of commodities, and these can guide purchasers to delay buying in order to maximize cash flow.
Using the Calendar to Leverage Cash Flow
Sometimes a purchase decision can be affected by a difference as small as one single day. This often is true for tax concerns that revolve around dates, since many tax laws have specific dates on when their rules go into effect. If a tax change allows for faster depreciation or a bigger deduction for some types of purchases after that date, it may be financially preferable to wait until the tax climate is more favorable.
When making any kind of purchase, consider whether the same or equivalent product or service will be available for less in the future—without having to wait too long. Examine consequences of pending tax law changes, material and supply price trends, seasonal factors, and anything else that might bring about a lower price in the future.
Maximizing Value on Purchases
It can be tempting to accelerate purchases and stockpile large quantities of supplies and materials if they become available at an attractive price for a limited time. All other things being equal, obtaining needed supplies and materials at a better price frees up cash flow. But pay careful attention to the volume of these purchases and their actual savings. It's possible that the cash invested here could be put to better use elsewhere.
If using the cash to purchase amounts beyond immediate needs means you have to borrow to fund other activities, then borrowing costs are basically added to the purchase price of the discounted goods. If a deal isn't good enough when its costs are compared to other uses of cash, it may be wise to decline making a big buy at the sale price, and stick to the regular buying schedule.
When considering any large purchase, or purchasing equipment and materials that will last for at least a year, conduct a thorough financial analysis. Examine the business benefits of that purchase—which may include higher sales or lower costs—and what may happen with those costs in the foreseeable future.
Doing these exercises won't reveal the future perfectly, but they can help make a well-informed, calculated decision about whether to buy now—or wait a little longer.
About This Author
Mark Henricks is a freelance journalist covering business, entrepreneurship, technology, personal finance, health and fitness for leading publications.
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