One banker says that the principles of cash management are easy: "Collect fast, pay slow, and invest in the meantime." But sometimes it's just the opposite. Do you know when? For an indication of how good a cash manager you are, try this test:
You buy merchandise on standard terms of 2/10 net/30 (a 2% discount for payment within 10 days, or the full amount due in 30 days). Before reading the next paragraph, choose from among the following possible answers the approximate cost, on an annual basis, of passing up the discount and paying in 30 days instead: a) 2% b) 8% c) 20% d) 24% e) 36% f) 72%.
To find the correct answer, first assume you earn a 2% return on a 20-day investment -- that is, giving up your cash 20 days early. Then multiply by the eighteen 20-day periods in a year (assuming a 360-day year). It comes out to 36%. Unless you can earn more than that on your money, you should always take your cash discounts. Even if you have to borrow at 20% interest in order to do so, you come out ahead.