Odin’s Opinion (6): Terms of Payment!

I strongly feel that the craft distilling industry deserves worse terms of payment, when ordering stills and fermenters and mashers. Yes, you read that correctly: worse instead of better. Why? Let’s dive in deeper.

When you purchase a still, the manufacturer will inform you about their terms of payment. These terms basically tell you when to pay what percentage of the total acquisition sum. Usually, there are two or three terms. Always an initial downpayment (to take your order into production) and a final downpayment (usually upon delivery), and sometimes there is a payment in between (for instance upon completion of the actual build).

Given the above, a 30%/70% payment scheme sounds like a better deal for you than a 70%/30% payment scheme, right? I mean, in the first example you only pay 30% to place the order and start the manufacturing process. In the second example, you have to pay much more up front. Sorry to throw a bucket of cold water your way, but considering the 30%/70% order the better deal is actually wrong!

When considering the build of a new still, a still manufacturer basically has to judge the answers to three questions:

  1. What are the direct costs of building the still?
  2. What are the indirect costs of building the still?
  3. Does the price, and the terms of payment, cover both direct and indirect costs?

Direct costs can be directly attributed to the still the manufacturer contemplates building. Think “material” and “labor hours”. Examples of indirect costs are “rent” and “finance”. The rent of the building and the budget for the finance department are fixed costs. Even when no still is built, these costs need to be paid.

Of course the price, and the terms of payment, need to cover both direct and indirect costs. Where that is not the case, that company runs a severe risk of bankruptcy. When a company’s price covers more than the direct and indirect costs, a profit is realized.

How does this translate to terms of payment? Quite easily, actually. The first downpayment, that basically triggers the start of the manufacturing process of your still, should cover the direct costs. The final downpayment should cover the indirect cost and result in a profit margin.

Now, with that knowledge in mind, what does that “advantageous” 30%/70% deal tell you? Here are some answers:

  1. If 30% covers the direct costs, this manufacturer must be very bureaucratic or use sub-standard materials or workforce, or:
  2. If 70% is needed to cover indirect costs and make a profit, for sure those profits are excessive;
  3. If 30% does not cover the direct costs and no excessive profit is realized, this payment scheme means that the manufacturer is pre-financing your order.

A low initial downpayment means that the manufacturer’s overhead is too high (or his quality too low), that his profits are too high, or that he is in financial trouble and needs to pre-finance orders (building inventory for which there are no customers).

Do you feel any of the above is good for you, as a distiller, considering to place an order? Would you like to pay more for overhead, an inferior product, or excessive company profits? Are you comfortable doing business with a company that pre-finances your order at its own expense?

I guess the answer to the above questions is “no”, isn’t it? The only good thing that can come from a 30%/70% proposal, is that there may be room to negotiate the price downwards … but that may increase the other risks mentioned above.

So what about the aforementioned “less advantageous” 70%/30% terms of payment, where you need to invest more up front? What does that tell you about the manufacturer you want to order with? Here we go:

  1. If 70% covers the direct costs, this manufacturer must have low overhead and focus on quality, or:
  2. If 30% is needed to cover indirect costs and create a profit, that profit for sure can’t be excessive;
  3. This manufacturer does not have to pre-finance orders, does not experience loss of demand, and probably runs a sound financial organization.

The only downside to doing business with a still manufacturer that has 70%/30% terms of payment, is that there isn’t going to be room for downward price negotiation …

Worse terms of payment are the better deal …

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http://www.iStill.com

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