Net 30 may be the standard sales terms for many industries where customers are expected to pay in full in 30 days.

 

But this was the toy industry I was in as head of finance and operations for Kidco, a toy manufacturer in Chicago (later merged into Matchbox Toys).  Sales terms in this retail industry were unusual, net January 15.  This was done to give retailers enough time to sell merchandise off their shelves during the holiday season. 

 

As you can imagine, that presented some challenges:

 

·         It created a big cash flow drain on the company.  Instead of collecting more frequently and using that money to finance new sales, we had to finance sales for the entire season.  This usually meant significant borrowings on a line of credit or factoring receivables.

·         We could have some large credit exposure with individual retailers and be tied to them for a long period of time.  A customer that was very credit worthy in late summer could change by January if they had a rough holiday season

 

Fortunately, we got through the season in good shape. 

Then came next year and we had on a hot, new toy on our hands, something every toy manufacturer dreamed off, a toy that could sell in the off season.  The product was the "Burnin’ Key Car", a Matchbox like vehicle that operated with a key.  Insert the key in the rear of the car and the car would take off.  Kids would now have a key like mom and dad and be able to race their friends without having to set up a track.

 

We had an issue though, what to do about the sales terms.  Net January 15 would mean an incredible investment in receivables. If the product took off, we would be hard pressed to finance all the volume and might have to turn away business.

 

Early reads from buyers showed a lot of interest.  We decided to break away from the pack and sell just this product line on net 30 terms.

 

It worked out tremendously.  The product sold well, thanks to some creative advertising to get the word out and the product flew off the shelves.  Retailers were happy to have this product and it sold through so fast that the aggressive sales terms of net 30 were a non-issue.

                    
 

What a blessing for our cash flow!  Normally we would not pay off our line of credit until the following January.  Thanks to the high margins and turnover of the "Burnin' Key Car", we paid off the credit line in the unheard of month of August.  It came at a terrific time for us as well because interest rates were at record highs at the time.

 

Breaking away from industry sales terms can be a hard thing to do.  If you have something very new happening, it might be a great time to consider it.