More than 20 years ago, in the MBA course, the finance professor, taught that central to finance is the art of maximizing working capital at the lowest cost! He explained that the excellent CFO is one who collects cash early from customers, and pays suppliers as late as possible! Obviously this gap, which remains standing if the corporate keeps implementing this as a policy, becomes cash available to the enterprise to do business with it! Essentially, you finance your own operation by taking cash from your customers, doing business with it for the longest time possible before you hand out as slow as possible your obligations to your suppliers!
This becomes a critical source of finance, alternative to borrowing from the bank to finance operations, or having to raise equity.
This process of financing on the back of stealing time from others is marked as the cheapest way to finance your operation, and the “cheapest” it is! Really cheap!
It struck me when the professor said it then, and still strikes me until today as this nonsense remains integral to the DNA of finance practices everywhere, and gets even worse in large corporates, counter-intuitively!
See this for example: https://lnkd.in/g6xu3RyY
Or check any text book about finance and you will see it there sitting in the heart of the central dogma!
It strikes me that the religion of Islam teaches exactly the opposite thing: “Give the one you’ve hired his pay, before his sweat is dry” says the prophet peace be upon him! (Translation of meaning), Ibn-Maja.
Islam also teaches that as a customer, you should pay in cash immediately if you can, and that one should not resort to credit payment unless he has to! Why?! Because being in debt at any point of time in your life is exactly what you don’t want to be! Being in debt is a chain around your neck, and not the status in which you want to leave this world and meet God!!
But we look around us, and find everyone wants to give you credit, because they also make money on it, on interest! They will be willing to give you a discount or a little “gift” if you pay in credit and be indebted to them so that they take the easy money of the interest! But if there is no interest, getting a credit payment term is very difficult and will typically cause you to pay a higher price than usual or lose a bargain, unless you have purchasing power at volume!
In inflationary economies or depreciating currencies, the tyranny is even worse, by the time you pay, money has lost value!
It is the same menace at both ends of the formula! Converting other peoples’ time to make a buck out of thin air by turning them into involuntary lenders to your business – I call it stealing! Stealing time!
The miserable disaster, is that the world has lost the sense of ethics to the extent stealing is called a good practice!
Alas!
Ahmed.
Finding Truth