Coming back now to the financial problem of carrying on an instalment business, let us take the hypothetical case of a product which sells at a retail price of $100. We will say that the cost to the manufacturer or retailer is $60, the selling expense is $20, and the overhead charges, including collection expense and loss, are $10, leaving net profits of $10. We will assume that the firm which sells this product disposes of 50 of the articles during the first month of operations; 100 the second month; 150 the third month; 200 the fourth month; and thereafter regularly sells 200 each month. We will assume, further, that instalment payments are made at the rate of $10 per month. In order to simplify the problem, we will make the arbitrary assumption that the whole $90 outgo, including collection expense and loss, is incurred at the time each sale is made. Under these assumed conditions, how much working capital will be required to "swing" the stated volume of business? During the first month the outgo would be 50 times $90, or $4,500 and the cash receipts would be 50 times $10, or $500, leaving a cash deficiency of $4,000. During the second month the outgo would be 100 times $90, or $9,000, while the receipts would be $500 covering sales made during the first month, plus $1,000 for sales during the second month, making a total of $1,500; leaving a cash deficiency of $7,500. Putting these and succeeding calculations into tabular form, they would be as follows:

Outgo

Receipts

Cash Deficiency for Month

Accumulating Deficiency

First

month

$4,500

$500

$4,000

$4,000

Second

,,

9,000

1,500

7,500

11,500

Third

,,

13,500

3,000

10,500

22,000

Fourth

,,

18,000

5,000

13,000

35,000

Fifth

,,

18,000

7,000

11,000

46,000

Sixth

,,

18,000

9,000

9,000

55,000

Seventh

,,

18,000

11,000

7,000

62,000

Eighth

,,

18,000

13,000

5,000

67,000

Ninth

,,

18,000

15,000

3,000

70,000

Tenth

,,

18,000

17,000

1,000

71,000

Eleventh

,,

18,000

18,500

500*

70,500

Twelfth

,,

18,000

19,500

1,500*

69,000

*Excess receipts.

It is clear from the above table that, in case the instalment seller intends to carry the whole burden of financing on his own shoulders, he must be prepared with a working capital amounting at a maximum to $71,000. Unless his business afterwards increases more rapidly than his cash receipts, he will be able later to draw large profits in cash which are the accumulated results of sales that he has made during the preceding months.

The case above given is necessarily crude, for within the space limits that can be assigned to the subject in this volume it would be impossible to enter into all the intricacies of the calculations that would be required in any actual case. The figures presented, however, serve to emphasize two principles which must be borne in mind in connection with all instalment financing:

1. During a period of rapidly increasing business the cash receipts cannot keep pace with the volume of sales and the outgo. Such a period, therefore, necessarily involves a severe strain on the financial resources of the instalment house. It is for this reason that prosperity and large sales have so frequently been the direct causes of financial disaster to firms that sell goods on instalments.

2. Inasmuch as cash receipts pile up much more slowly than sales, the first stage in building up an instalment business is a stage of heavy investment and of patient waiting. No matter what profits may be figured on the volume of business that is being done at this stage, it is evident that the realization of those profits in cash will necessarily be deferred to a later period. This preliminary stage may last for several years. After the business becomes fairly stationary, however, cash receipts from preceding sales begin to accumulate with rapidity and presently the financial position of the house becomes very strong.

The question arising in connection with every instalment business, therefore, is: what can be done to shift some of the financial burden of building up the business from its own shoulders to the shoulders of its bankers or of other financial agencies? Unless this problem can be satisfactorily solved, an instalment house must necessarily be limited in its growth by the capital that can be contributed by those directly interested in the company. The problem is made peculiarly difficult by the fact, to which allusion has previously been made, that bankers, as a rule, have not been favorably impressed by their dealings with instalment houses and are not inclined to look with much favor on propositions to aid in financing such enterprises. In fact it may be said that, so far as new enterprises which sell on the instalment plan are concerned, they cannot reasonably hope for financial assistance from banks until after their business has become well-established and has proved itself sound and profitable.

Established instalment enterprises, which have a growing business and therefore require additional financing, are ordinarily able to obtain the temporary advances of working capital that they need in one of three ways:

1. By securing a large line of credit from their banks simply on the strength of their general showing of profits and their accumulating assets, consisting of instalment accounts receivable.

2. By securing, as indicated above, notes from their purchasers. Those concerns which make their sales in units of considerable size are frequently able to discount these notes or to place them as collateral for bank loans and are thus able to finance their requirements. This is very largely done by firms which sell agricultural machinery. The chief financial strain upon them is largely in the nature of a seasonable strain and the financial help which they require, is, therefore, of a more temporary nature than is the help required by instalment houses the business of which is not greatly affected by the seasons. 3. By making arrangements, not with a bank, but with a financing company, which will either purchase their instalment accounts or instalment notes receivable, or will make advances against these accounts or notes which are put up as collateral.

This last method brings us to the subject of converting assets into cash, which is treated in the next section.