Managing Your Cash Flow

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Beer, condoms and trapped cash

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"Are you familiar with condom vending machines?” I asked. It turned out he was. In fact, he claimed better than average knowledge. “You’re in the pub,” he chuckled, “you have too much to drink and you need to go to the toilet.  You have some pound coins, you’re feeling lucky, you feed the machine, stuff your pockets – but you never use ‘em.”

If anyone had ever wondered why it made sense for the first condom vending entrepreneur to install a condom vending machine in a pub, there was the first reason: there’s a clear synergy between beer and condom sales.

In fact there was something else I hoped my friend would understand, too, and I started telling him about my own experience of condom vending machines. My firm had worked on a project where our client was buying a condom vending machine business. Someone at our firm had the job of working out how much cash, on average, each of those machines contained. Roughly £5 was the answer, across tens of thousands of machines. That was a fair amount of cash.

“Do you think that cash could ever have been extracted out of the business?” I asked. My Norwegian friend didn’t have to think for very long. “No,” he responded. He figured that the condom people were operating as efficiently as they possibly could. Someone had to open the machines to take out the cash and there was a cost attached to that. A management accountant somewhere had done the cost benefit analysis and it would probably cost too much to increase the rate of collection.  It was going to be hard to get below that £5 threshold. This was trapped cash; cash you can never get out of a business, no matter how hard you try.

Very quickly we had found a second reason why it might make sense for condom vending machines (or other vending machines, for that matter, such as bank note vending machines) to exist inside pubs. For a large proportion of the week, a pub landlord is on the premises. That landlord can empty the machine, use the money in the till and then head to the bank to deposit any surplus cash each day. It’s pretty hard to see how that £5 trapped cash figure would ever get much lower.

I looked across at my friend and saw the cogs whirring. He appreciated the importance of finding out that a condom vending machine business had an average of £5 trapped cash inside every machine it owned. That was a lot of money that could never be extracted out of the business.

Condom vending machines aside, he was thinking about buying a different business and was expecting to inherit a certain amount of cash. If some of that cash was unavailable, he would be completely justified in reducing the millions he was paying, and that price reduction would be a significant saving for him.

With a smile he turned to me: “Let’s have a look at trapped cash then shall we?”

*Joanna Smith is business development director at financial training company Financial Training Associates.

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