Here’s an example to demonstrate how focusing on the cost can lead to lost opportunities.
Let’s say you have a business with Sales of $100,000, and a Gross Margin of 30%, or $30,000, and you have an opportunity to grow your Sales to $200,000, high growth of 100% If you can fund this growth with your own working capital, you will now generate $60,000 in Gross Margin.
However many times you internally generated funds are not sufficient to fund such high growth. If you sell to other businesses and have B2B accounts receivable, many times factoring can provide the funding you need to grow at a high rate.
Let’s say the Cost of factoring the additional $100,000 in Sales is 5%, or $5,000. So now at the higher level of Sales of $200,000 your Gross Margin will be $55,000, that is $60,000 less the $5,000 for factoring.
Now I ask you: Which do you prefer? a Gross Margin of $30,000 or $55,000? of course the answer is obvious, but the point of the message is that sometimes you focus on the $5,000 cost, and loose the opportunity of making and additional $25,000 in Gross Margin.