Cash traps are a myriad of deceptive practices that companies use to get you to spend more money. Learn how they work and what your rights are when it comes to these sneaky marketing techniques.
“Cash trap meaning” is a term that refers to the act of someone trying to scam you for money. The “cash trap” is one type of scam, but there are many others.
Profits aren’t the same as cash. Profits are a notion in accounting; money is what we spend. We use cash to pay our bills and wages. While a plan-as-you-go company plan may not contain a full-fledged financial projection (at least not until it is required), it should be aware of cash balances and cash flow.
This should be a very straightforward idea, yet we’ve been conditioned to prioritize profits above cash. It’s the way the world works in general. They think about how much it costs to create something and how much more they can sell it for, which equals profits, when they prepare the fabled business plan on a napkin.
You may, however, be lucrative even if you don’t have any cash on hand. Worse, it seems to happen often while you’re growing up, turning good news into terrible news and catching people off guard.
Here are several traps to look out for in order to prevent cash flow issues.
Every dollar in receivables equates to a dollar in cash.
Although it may seem counterintuitive, having more receivables means having less cash. You can complete the analysis in a reasonable amount of time. Assets must equal capital minus liabilities, thus having a dollar in receivables as an asset really implies having one dollar less in cash. It would be money, not accounts receivable, if your customers had paid you.
|A Few Words about Money: Essential Cash Vocabulary
|Some individuals are turned off by these terms because they sound like accounting or financial analysis. But they’re useful words to know, particularly if you’re in charge of a company. Receivables is short for accounts receivable, which refers to money owed to you by unpaid customers. Credit sales aren’t about credit cards; they’re about business-to-business sales. It occurs when you provide products and services to a business client along with an invoice but do not get payment right away. Until your company client pays you, the amount you charge is called accounts receivable. The number of days a company waits to be paid by its clients is referred to as collection days.
Inventory refers to items that you buy and retain till you sell them to consumers. That may be resources you’ll put together into something or goods you’ll sell to consumers. Inventory is a valuable resource. It does not constitute a cost until it is sold. As a result, it does not appear on the profit and loss statement until it is sold. However, it’s likely that you’ve already paid it.
Money owed to you is referred to as accounts payable. Accounts receivable to you becomes accounts payable to them when your company customers fail to pay you.
Business-to-business sales is a topic that comes up often. When a company provides products or services to another business in most parts of the globe, instead of receiving payment for the transaction immediately once, an invoice is sent, and the business client pays later. That isn’t always the case, but it is the norm rather than the exception. By the way, that’s what we call credit sales; it has nothing to do with credit card sales (which, ironically, is usually the same as cash less a couple of days and a couple of percentage points as fees).
This may be used to make financial projections: the more receivables you have, the less cash you have.
Example: A business that is operating well and has an average receivables wait time of 45 days has a stable cash flow and a minimum balance of just about $500,000. When a company’s collection days are increased from 45 to 90, it incurs a debt of more than half a million dollars. That’s a difference of over a million dollars between the two scenarios. And this is in a business with less than 50 workers and yearly revenues of less than $10 million.
The key is that receivables are unimportant to profit and loss. When you sell $1,000 worth of goods that your customers haven’t paid for yet, you make the same amount of money as when you sell $1,000 worth of goods that your customers have paid for immediately in cash. The cash flow consequences are obviously different in both cases.
Every dollar spent on inventory equals a dollar spent on cash.
Inventory is what happens when your company needs to purchase something before it can sell it. It’s one of your most valuable possessions. Keeping a large amount of inventory may also hurt your cash flow if you don’t pay for it.
This may be a very straightforward calculation. If you have no inventory and have $20,000 in cash, having $19,000 in inventory leaves you with just $1,000 in cash. That is, assuming the inventory has been paid for. This is because all of your other assets, liabilities, and capital are the same.
Of course, you won’t always be able to pay for that inventory, which means you’ll have more payables, which will boost your cash balance.
With various assumptions, the difference in cash may be significant. You can see what a difference two months makes in a graphic titled What a Difference Two Months Makes.
Every dollar in payables equals a dollar in cash.
While receivables and inventory eat up cash by allocating assets to items that might have been cash but aren’t, paying your own invoices late is a tried-and-true method of protecting your cash flow. Because the same fundamental arithmetic applies, you will have more cash if you keep your money in cash rather than spending it to pay your expenses.
It’s called accounts payable, and it refers to money you owe. Every dollar you have in accounts payable is a dollar you don’t have in cash if you pay the bill. When you sell to companies, you have the same issue, but when you are a company, you have an edge. The buyer’s accounts payable is the seller’s accounts receivable.
Now, I’m not saying you don’t pay your bills or that it doesn’t matter to you. If you don’t pay your payments on time or are consistently late, your company will have credit issues and a poor image. Even yet, many companies rely on accounts payable to help them fund themselves.
The “latest atm frauds 2020” is a warning to be aware of the cash traps. They are typically found in places like gas stations, convenience stores, and other similar locations.
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