Recently I have been reading a fascinating book by Hans Rosling, which I would recommend you read, it’s called Factfulness – Ten Reasons we’re wrong about the world – and why things are better than you think; (ISBN 978-1-473- 63749-8). What really caught my attention was when he was sent by UNICEF to find out how Rivopharm, a small company in the Swiss Alps, could bid to supply Malaria tablets to Angola at less than the cost of the raw materials.
When he visited the factory, he was given a lesson in how, by using technology to automate their manufacturing process, they could manufacture and ship within three days. Fine, but how could they sell for less than cost?
Cash Flow - they agreed payment from UNICEF within 4 days and agreed payment terms from their suppliers of 30 days, so for 26 days they earned interest on the difference!
That’s Think Cash!
They are not alone in this. This is how Amazon grew from Bezos' garage in Bellevue, Washington, initially selling books online. He got paid immediately and paid his suppliers in 30 days. Result, his customers funded his growth, while at the same time he could undercut high street book shops. He didn’t need to make a profit on the books, he made it on the markets! They still work this way today, which is why it has grown so big, as on paper, by using this method, Amazon can undercut everyone.
Bezos used this to start, as did Rivopharm and even closer to home, so did Carphone Warehouse, who got three months credit when they started, allowing them, initially, to grow without the banks!