In my day job, I spend most of my time dealing with “cash flow”.

*breathes deeply*

In my mind, hellfire is not a raging furnace: it’s a slow leak of heat that might be burning you, but it might also be okay, and because you can’t tell, you hover eternally on the brink in a heightening state of anxiety waiting for something to go horribly wrong, at which point you’ll discover that your cash budget missed out some crucial but obvious expense that subsequently blew the shaky legs out from under the boardroom table.

And for anyone that doesn’t know how to manage a cash flow, the task consists mostly of:

1. Calling people that owe you money and asking them when they’re going to pay.
2. Not calling people that you owe money, and avoiding their calls when they call you.
3. Playing around with spreadsheets in an attempt to peer through the veil of time to see if you’ll have enough money to pay salaries (while taking into account the uselessness of banks that take many days to clear transfers to and from your bank account).

And the crux is that your customers tell you that they’re waiting for their customers to pay them – and you tell your suppliers that you’re waiting for your customers to pay you. Which begs the question – where does it all start? Because it feels like a chain of dominoes waiting for the push at the important end of the line.

The answer must be an industry that buys goods on credit, sells for cash and then sits on the money until it’s due to pay its suppliers.

I give you: the supermarket. And almost any store that sells fast-moving consumer goods (FMCGs) to the general public (you and me). Why? Because we swipe our debit cards, or hand over cash, directly into the coffers. We don’t tend to have store credit at supermarkets. Maybe we’ll have credit cards – but then we absorb the debt while the supermarket gets the money in their bank account.

Not All Loans Come From A Bank

Big retailers have the option of taking out large, long-term, interest-free loans from their suppliers. A hypothetical example:

• Pick n Pay (PnP) sources its ice-cream from various dairies (I’ll refer to them collectively as The Dairy Industry).
• Let’s say that, on the 1st of the Month, PnP arranges the supply and delivery of R100 million worth of ice-cream, which it will pay for in two instalments of R50 million: one at the end of the month, and the second in the middle of next month.
• The ice-cream gets delivered and all of it is sold before the month is over.
• PnP pays the Dairy Industry its R50 million at the end of the month, and then organises another R100 million worth for Month 2, on the same payment terms.
• The net result: every 2 weeks, the Dairy Industry gets a payment of R50 million from PnP. Which sounds like a reasonable deal, right?
• Only, because the payment is always in catch-up, the Dairy Industry is always owed a minimum of R100 million by PnP at any one time.
• A timeline:

And because the Dairy Industry views PnP as an important customer (taking R100 million of its product each month), there will realistically never come a time when the Dairy Industry will stop supplying PnP – so it will work its costs to be within the parameters of the cash flow.

PnP then always has, at a minimum, R100 million owing to the Dairy Industry. Some of that will be invested in the ice-cream itself, sitting on shelves – but if we assume that it sells the ice-cream evenly over the month, by the end of the first two weeks, it has R50 million in cash and R50 million in ice-cream.

From that point onwards, it will always have at least R50 million in cash. In other words, it has effectively borrowed a permanent cash loan of R50 million from the Dairy Industry. Money that costs it nothing in interest (because you just don’t pay interest on trade credit).

And that’s not taking into account a few things:

1. Growth in trade (which results in ever-larger outstandings), and
2. Extended credit terms (the inevitable angling point for retailers – which also pushes up outstandings).

What would you do with an Interest-Free Loan?

As a supermarket, you begin by using it to expand into a giant retail chain (buy stores, build stores, take-up more supplies on credit).

Once you’re done expanding, and you have these large cash piles, you start a bank. And you can afford to charge really low bank fees, for a couple of reasons:

1. You don’t have to pay your depositors (your suppliers) any interest;
2. Your depositors can’t just demand their money at whim (you’ve already defined their credit terms);
3. You can turn your supermarket cash registers into bank tellers, and you add a small banking hall at the back next to the cigarette kiosk (almost zero capital investment required – you just use the supermarkets better); and
4. You have access to all of your customers already, and can persuade them in by offering store discounts if they shop using their supermarket-bank credit card.

So you start earning money for (literal) jam.

Why didn’t it work for PnP?

Pick n Pay attempted to bring this model to South Africa in the early 2000s, following in the footsteps of big success stories like Tesco Bank in the UK. Unfortunately, in 2008, Pick n Pay’s Go Banking division was absorbed into Nedbank and the operation turned into this staff benefit for Pick n Pay employees (not just anyone can go and open a Go Banking account anymore). This was despite the fact that it offered some of the lowest banking charges around, with all the store benefits and so on.

The trouble is, supermarket-banks, for all their strategic and business brilliance, face one significant obstacle. This thought:

“But you’re a supermarket, not a bank. What are you talking about? I bank with a bank. Why would I bank with a supermarket? Eina/Geezlike/FFS, these guys. No sense. NONsense.”

If you can’t get your potential customer base to cross over into a world where your supermarket is also your bank, then that’s a bit unfortunate. And it seems like South Africa just wasn’t ready – because after extensive marketing and a 7 year trial period, Go Banking only had 90,000 customers. Which just isn’t popular enough.

But today, the medical aid people are having a go (yet another cash-rich industry).

Discovery credit card, anyone?