Guitar Center on the skids,

[sahib]

I'm curious when the Net-30-60-x  terms first became standard practice in buy/sell merch business.  It would seem that from the start it's a system designed to thrive on borrowed time and inevitably fail when cash dries up.  If the only option was to "pre"-pay for goods, this would be a non-issue.  I understand that a Net-30 is a grace period for a retailer to try to sell the product and make a profit before having to pay for said product but this creates risk for both the manufacturer and retailer.  If every retailer had to pre-pay for product, perhaps they'd be forced to become better retailers...spending more time doing their due diligence on what products will actually sell, rather than hoping that they can sell something before the 30 days is up to cover their debt.

I've wondered this for a while because this problem extends far beyond audio. It's become the bedrock of modern trade...We live in the "I'll pay you tomorrow" economy.

I do not think there is a known date for that. It evolved over a period of time. 

In my product design and modelmaking business I had stopped giving 100% credit around 2000.  My terms were always 50% with the order and the balance in 30 days.  My customer base included companies in defence industry which would not even entertain anything less than 90 days and naturally at first went whaaat? But soon they agreed.  Why? The reason has always been my life motto. I need money like anybody else, but if I am going to start losing  sleep because of cash flow then I don't want that money. If you want my services/goods than that's how its going to be.

 

[pvision]

I do not think there is a known date for that. It evolved over a period of time. 

In my product design and modelmaking business I had stopped giving 100% credit around 2000.  My terms were always 50% with the order and the balance in 30 days.  My customer base included companies in defence industry which would not even entertain anything less than 90 days and naturally at first went whaaat? But soon they agreed.  Why? The reason has always been my life motto. I need money like anybody else, but if I am going to start losing  sleep because of cash flow then I don't want that money. If you want my services/goods than that's how its going to be.

My bank manager once gave me some sage advice - that your terms of trading are whatever you say they are. If you're fed up with 90 days (and who isn't?) then make it 7 days. Or zero days

Most businesses wouldn't let a product out of the door without payment, but a lot do. Who's the loser?

Nick Froome

 

[Krcwell]

The 30/60/90 day payment terms are beneficial for both sides in mass retail.

When a mass retailer brings in a new product, for example Target, which has ~1,800 stores in the US, they have to buy enough up front to stock the shelves in each of those stores. The initial pipefills on say a $500 product are 2-3 per store, so 3,600 to 5,400 units up front. This is the amount of stock they will maintain in their stores for as long as they carry the product, so they continually have $1.8-2.7m of inventory on their books, and weekly sales may be 300 units, $150k. However, if it takes 2-3 weeks for the product to get to store through their supply chain, then they also need to start ordering replenishment to maintain store stocks, 2-3 weeks before you've even earned dollar one from your very large initial investment.

The initial pipefill orders are great for manufacturers as well. Large volumes up front help cover their spend on R&D, tooling, manufacturing, marketing, etc... but you can't expect the retailer to take on the full risk of a new product launch immediately. 60 days at least allows the retailer to get 4-5 weeks of sales (roughly a third of the initial pipefill order @ 300/wk, $600-700k) before they have to pay.  After 60 days, the manufacturer gets a huge chunk of cash from the initial pipefill order, then a steady stream thereafter.

 

[PRR]

> when the Net-30-60-x  terms first became standard

I bet King Tut got his stone "now" and paid-up later. His suppliers knew he was good for it, and the bushels of grain would be issued "some time", but there's a lot of parchment-work to verify the order, the delivery, the quality, move grain from one account-chamber to another, assign a cart-loader to haul the grain out to the treasury door......

Actually a lot of that was mud tablets, which can't be sent through inter-office mail until the clay dries. With a many-level bureaucracy spread over several departments, golf on Wednesdays, Anedjib is out sick with worms, Qa'a lost the original order.... 30 days might be fast work.

And what "net 30" really means is: Due now, but I won't sue you for a month. And the idea of a stone-cutter, or a minor supplier, suing King Tut or Guitar Center, for being a little slow to pay-up, is a bit silly.

I know I have heard such talk between my father and his father. Both were in "hot" industries (airplanes, mainframes) where some years you could demand cash-up-front and other years you would take any terms any buyer would offer (net 2 years?). But I do think most goods shipped on order (to known-good merchants) and accounts were settled toward the end of the month. And their orders for commodities (sheet metal, resistors) were on terms like Net 30. Note that at reasonable commercial interest rate, 6%/year, 30 days is like a half-percent discount. If you are hurting for 0.5%, you are too close to the edge. (Yes, a lot of business lives too close to the edge.)

I know the state college where I used to work was all 30-day supplier after-pay from the 1970s, and I don't think it was new then. When a supplier insisted on payment in advance, it took me about 30 days to hammer the deal through Purchasing, so all the same in the end.

 

[pvision]

Note that at reasonable commercial interest rate, 6%/year, 30 days is like a half-percent discount. If you are hurting for 0.5%, you are too close to the edge. (Yes, a lot of business lives too close to the edge.)

That makes sense - but only if the company has sufficient cash reserves to extend credit

In my experience, the biggest problem small companies have is lack of cash.  With banks now unwilling to lend to small businesses, calling in overdrafts & etc, how does a small company grow?

The other side of extending credit to your customers is that the cash you are effectively lending could be being more productive in your business - buying stock, supplies, paying overdrafts, etc

The whole Guitar Centre death-spiral scenario reminds of the "Too Big to Fail" banks & financial institutions. It might be a simplistic view but I think propping up these failing businesses just perpetuates bad business models

Nick Froome

 

[JohnRoberts]

Note that at reasonable commercial interest rate, 6%/year, 30 days is like a half-percent discount. If you are hurting for 0.5%, you are too close to the edge. (Yes, a lot of business lives too close to the edge.)

That makes sense - but only if the company has sufficient cash reserves to extend credit

In my experience, the biggest problem small companies have is lack of cash.  With banks now unwilling to lend to small businesses, calling in overdrafts & etc, how does a small company grow?

I wrote a long post about my experience as a small manufacturer with cash flow problems but deleted it (you're welcome).

Yes this is a classic problem. Success and growth takes working capital and banks will only lend enough to get started (based on your assets they can attach to get paid back). Intermediate stage growth must come from equity investments, either angel investors or nowadays some crowd funding. The government has always promised to help, but the SBA (lending) was not my friend when I needed working capital. . 

The other side of extending credit to your customers is that the cash you are effectively lending could be being more productive in your business - buying stock, supplies, paying overdrafts, etc

This is classic problem for small manufacturers since dealers are routinely short of cash, so only pay the manufacturer they have to, to get more of the fast selling products. If your products isn't selling well you are double screwed.

The whole Guitar Centre death-spiral scenario reminds of the "Too Big to Fail" banks & financial institutions. It might be a simplistic view but I think propping up these failing businesses just perpetuates bad business models

Nick Froome

I think death spiral is over stated... While it may look like they are re-arraqnging the deck chairs on the titanic, I didn't see any iceberg, just rich investors having a bad day.

JR

 

[Krcwell]

The main difference between Guitar Center and "too big to fail" is who does the propping. For Guitar Center, it's private capital that some investors willingly provide. For "too big to fail", it's on the back of the taxpayer.

You mainly see too big to fail in heavily regulated industries, i.e. Banking/finance, insurance, the auto industry, etc... Heavy regulation creates crazy barriers to entry for new competitors and also provides ample opportunity for unscrupulous individuals on both sides to tilt regulations to favor certain businesses, thus leaving entire industries with only a few "too big to fail" players. Crony capitalism at it's finest.

 

[bitman]

And..... Kids don't play with the toys from GC. They get their playtoys from the cel phone shops.