Nothing like a good idiom to shed light on a problem. Being penny wise and pound foolish is really saying that focusing on saving a small amount of money may prevent you from earning a large amount of money. “Seeing the forest for the trees” is another idiom with similar meaning. This refers to being myopic in your view and not looking at the big picture. What do these idioms have to do with offering a consumer financing program?

Expense Versus Opportunity

All businesses have expenses. Good managers track expenses and manage them to a budget. Expenses such as fixed assets, personnel, and sales and marketing are, of course, necessary to conduct business. When the clock strikes 10am and your business opens to consumers, you have a set of fixed costs for the day that won’t go away!

You already paid the lease on your facility. Your electricity bill is paid. Your staff are being paid. You spent on advertising to drive traffic to your facility or web properties. So, when that consumer engages you to purchase your product and wants or needs to pay-over-time for the purchase with financing, you have a choice. You can choose to add a small variable expense (usually 10% or less) to closing the sale right then and there, or let the customer walk out the door to shop your competition.

The Cost of Doing Business

Some business owners look at that variable expense as an added expense they cannot afford. Holding to the budget and not considering this variable expense at point of sale can be looked at as penny wise and pound foolish. Why? Let’s do the math.

Every day your business is open you have fixed costs, as described above. For simplicity, let’s say that on a daily basis those costs are $2,000. As you budgeted, you expect, on average, a certain amount of sales each day to cover your costs and hopefully generate a profit. We know that your fixed costs will occur regardless of the day but that sales can fluctuate daily. Let’s say it’s Tuesday and you generated $4,000 in sales. On average, each sale has a “cost of goods sold” – the cost of the product being sold, which, when deducted from the sale price, generates what is called a gross profit margin. If the average cost of goods sold is $2,500, your $4,000 in sales would have created a gross profit margin of $1,500. Having fixed costs of $2,000, you would technically be operating at a loss of $500 for the day.

Covering Your Fixed Costs

If, on this same day, you had a potential sale of $1,500 but, unless the customer was able to pay-over-time, the sale wasn’t going to happen. Had they been able to put it on their credit card, you would’ve gladly taken the sale and absorbed the 2% interchange fee. The question is, would you have paid 5% or even 10% using a consumer financing program?

Rather than receiving 98% of the sale price using a credit card transaction, you would receive 95% or perhaps 90% of the sale price using a financing program. But, as long as your gross profit margin on the sale of this item is less than the sale price, net of variable fees (financing, commission, etc), you have additional profit to offset your fixed costs. So, why wouldn’t you spend a little more on financing fees to do this?

Forest Or The Trees?

Some retailers look at variable cost on a given sale (the “trees”) rather than the gross profit generated across the business’ fixed costs (the “forest”). Being penny wise on a particular sale may look like a good business practice, but is actually being pound foolish when trying to cover your fixed costs. Does it really matter if the five sales you made today generated a desired profit margin (seeing the trees) but failed to cover your fixed costs? Had you made seven sales today at a slightly less gross profit margin, you may have more than covered your fixed costs (seeing the forest!)

The goal of a for-profit business is to be net profitable. The amount of profitability is directly correlated to how a business covers its fixed costs and then generates profit over and above these fixed costs. Generating incremental sales help to do this and offering consumer financing can help. The health of a business is not judged by net profit margin on a particular sale but by net profit margin across all sales.

~ David Weyher