Tuesday, the White House released its budget proposal. While most of the national news has highlighted the cuts to Medicaid, Food Stamps and other...
You have invested in sales leads. On top of that, office space, employees, vehicles, utilities and other costs loom overhead even without sales. So what does it really cost to walk away from a sale because it’s been turned down by a primary financing source?
An economist would tell you that the cost is the “opportunity cost” of the lost sale. In other words, the profit that would have been made on the sale is the cost of losing the sale.
For example, assume that you sell water treatment devices at a 50% margin before overhead. The product costs would be the manufacturer’s cost of the product plus the salesman’s commission. Assuming a $5,000 selling price and a sale of one unit, your income statement for the monthwould look like the following:
Now, take this example one step further. Let’s assume that you really had three sales for the month, but for two of those sales, you were unable to obtain financing through your primary financing source. They were lost sales. Also assume that a secondary financing source would have paid you 70% of the selling price for these rejected applicants. This is what your income statement could have looked like:
(a) Two sales at $5,000 x 70% = $7,000.
(b) Cost of sales for two sales at $2,500 per sale.
(c) To complete these sales, you are not going to buy a new building, add employees or vehicles. Overhead will remain the same whether or not these sales are completed.
In this example, the opportunity cost (or the cost of lost sales) is $2,000. By working with a secondary financing source, you can turn that cost into a profit. Just by using a primary financing source, there was an opportunity cost of $2,000; however, by using a secondary financing source for those customers turned down by a primary financer, the $2,000 loss becomes $2,000 of income.
Secondary financing sources will not pay 100% of your selling price. The primary financer rejected the person because he or she had credit issues. Therefore, a secondary financer will pay less than 100% because there is a higher risk of non-payment; however, even if you receive less than 100% of the sales price, you can still put more money in your pocket by turning a costly lost sale into a profit.