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Businesses which Generate Float


DooDiligence
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I'm interested in identifying businesses which accumulate float & industries which are conducive to attracting float (other than insurers...)

 

For instance, I think that jewelers may be able to do this through vendors.

 

Many vendors offer memo programs (AKA consignment) & stock balancing (buy $100K & they'll memo & issue more merchandise as you sell.)

 

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Would asset managers AUM be considered float?

 

Are T. Rowe Prices AUM floaty?

 

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Are bank deposits floaty?

 

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Are PBM's floaty?

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Any type of deferred revenue business where cash is collected before the service is delivered serves as a mini float.

 

Does the revenue have to be collected or can the float come in the form of an asset which generates returns, like inventory as in the case of jewelers?

 

I don't think that most jewelers have "float".  Most of the jewelers that I deal with are "cash on the barrel head"...of course I am dealing with 1 man or family operations and not regional or national retailers.

 

Even so, I don't think that the big jewelers turn their inventory faster than 30 days....or whatever terms they acquire their inventory on.

 

Further, the cost of gold & silver & platinum is a pretty small percent of the cost of the item sold...especially at places like Kay Jewelers.  I've made some incredible "investments" buying women's jewelry before it got melted down. I pay a small premium to it's melt value and get to pick out what I like.  One time, I got a bunch of necklaces & bracelets, a lot of which had their Kay Jewelers box.  For example I bought some gold bracelets for $70-$100...Kay was selling them for $500 to $800 in their retail stores.  It is mind boggling what the markup is on low end jewelry!

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Airlines, enterprise software, some E&C and consulting firms bill in advance.

 

But, the airlines are a good warning that not all float is equal.

 

A floaty company, like an airline, is vulnerable during downturns. Not only do earnings and revenue drop, but cash is sucked out of the business as the float unwinds. That's why you want a stable source of float. A software company with 98% renewal rates can use the float to invest in new businesses.

 

On the other side, companies with negative float can be wonderful businesses too. Think of industrial distributors. One of their jobs is to provide working capital to customers. The negative float makes them very resilient businesses. During recessions, they release capital that can be used for buybacks, M&A, or paydown debt.

 

 

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Any type of deferred revenue business where cash is collected before the service is delivered serves as a mini float.

 

Does the revenue have to be collected or can the float come in the form of an asset which generates returns, like inventory as in the case of jewelers?

 

I don't think that most jewelers have "float".  Most of the jewelers that I deal with are "cash on the barrel head"...of course I am dealing with 1 man or family operations and not regional or national retailers.

 

Even so, I don't think that the big jewelers turn their inventory faster than 30 days....or whatever terms they acquire their inventory on.

 

Further, the cost of gold & silver & platinum is a pretty small percent of the cost of the item sold...especially at places like Kay Jewelers.  I've made some incredible "investments" buying women's jewelry before it got melted down. I pay a small premium to it's melt value and get to pick out what I like.  One time, I got a bunch of necklaces & bracelets, a lot of which had their Kay Jewelers box.  For example I bought some gold bracelets for $70-$100...Kay was selling them for $500 to $800 in their retail stores.  It is mind boggling what the markup is on low end jewelry!

 

I think an ITR of 1 +/- is about average (higher with larger stores/chains accepting lower margin.)

 

I quit offshore in 2000 & tried my hand at wholesale (miserable failure but I learned a lot...)

 

Thanks for your comments...

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Airlines, enterprise software, some E&C and consulting firms bill in advance.

 

But, the airlines are a good warning that not all float is equal.

 

A floaty company, like an airline, is vulnerable during downturns. Not only do earnings and revenue drop, but cash is sucked out of the business as the float unwinds. That's why you want a stable source of float. A software company with 98% renewal rates can use the float to invest in new businesses.

 

On the other side, companies with negative float can be wonderful businesses too. Think of industrial distributors. One of their jobs is to provide working capital to customers. The negative float makes them very resilient businesses. During recessions, they release capital that can be used for buybacks, M&A, or paydown debt.

 

Nice!

 

I hadn't thought about software.

 

I'm wanting to develop some investment ideas & possibly another entrepreneurial endeavor & your comments are extremely helpful...

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Interesting topic.

 

I hope inflation risk enters the discussion.

 

...and other liability risks.

 

Would these items be specific to insurers?

 

I don't see how liability risks have a big affect on software (other than litigation for interuption of business due to inoperability) & I can't see it affecting payroll processors at all (insurance could mitigate these...)

 

Inflation is a given & predicting it is difficult.

 

As long as the float gets deployed effectively (or returned to owners) what other risks could you outline?

 

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SAAS companies - Software-As-A-Service as opposed to perpetual licensing. Most of these SAAS companies

do revenue recognition month by month. License agreements are generally 2-3 years, cash up front (net 60 days),

then rev rec as services are performed. Much more predictability for forecast. Key indicators are the

bookings backlog and the renewal rate. The hockey stick of pertual licensing was tough to deal with.

 

Many people talk about CRM - don't forget about NOW, which has come on strong.

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License agreements are generally 2-3 years, cash up front (net 60 days)

 

They charge all 2-3 years in advance? Or annually?

 

The drawback of the SAAS companies is that they are investing heavily in Customer Acquisition Costs. So the float dynamics are burdened by the customer acquisition costs. Assume you spend $1500 to acquire a 3 year contract at $500 per, billed annually in advance. Technically, the float would be $500. But in reality, net cash is -$1000.

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License agreements are generally 2-3 years, cash up front (net 60 days)

 

They charge all 2-3 years in advance? Or annually?

 

The drawback of the SAAS companies is that they are investing heavily in Customer Acquisition Costs. So the float dynamics are burdened by the customer acquisition costs. Assume you spend $1500 to acquire a 3 year contract at $500 per, billed annually in advance. Technically, the float would be $500. But in reality, net cash is -$1000.

 

Could this be gauged similar to an underwriting profit?

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License agreements are generally 2-3 years, cash up front (net 60 days)

 

They charge all 2-3 years in advance? Or annually?

 

The drawback of the SAAS companies is that they are investing heavily in Customer Acquisition Costs. So the float dynamics are burdened by the customer acquisition costs. Assume you spend $1500 to acquire a 3 year contract at $500 per, billed annually in advance. Technically, the float would be $500. But in reality, net cash is -$1000.

 

Could this be gauged similar to an underwriting profit?

 

Probably. The dynamics are very similar to when Buffett bought Geico. The cost to acquire an auto insurance customer is much higher than the income generated in the first year. But the Lifetime Value of each new customer is much higher than the acquisition cost. So Buffett ramped up advertising, even though it hurt short-term net income and FCF. He could do this, because it was now a private company.

 

Interestingly, Mr. Market let's a few tech companies act as if they were private (try to maximize long-term value at the expense of short-term profits).

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I own a few vacation rentals I rent out short-term through websites such as Airbnb and Homeaway. When a unit is booked much in advance, the customer ends up paying immediately upon booking and I as the landlord only get the funds on or a few days after check-in. In the meantime, between the booking date and the check-in date (which could be as far as 12 months for those booking in advance) the prepaid funds must be sitting somewhere. Would this classify was float for these companies?

 

Although I'm sure these funds are "held in trust", the interest accruing on these don't accrue to the renter or the landlord.

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License agreements are generally 2-3 years, cash up front (net 60 days)

 

They charge all 2-3 years in advance? Or annually?

 

The drawback of the SAAS companies is that they are investing heavily in Customer Acquisition Costs. So the float dynamics are burdened by the customer acquisition costs. Assume you spend $1500 to acquire a 3 year contract at $500 per, billed annually in advance. Technically, the float would be $500. But in reality, net cash is -$1000.

 

Could this be gauged similar to an underwriting profit?

 

Probably. The dynamics are very similar to when Buffett bought Geico. The cost to acquire an auto insurance customer is much higher than the income generated in the first year. But the Lifetime Value of each new customer is much higher than the acquisition cost. So Buffett ramped up advertising, even though it hurt short-term net income and FCF. He could do this, because it was now a private company.

 

Interestingly, Mr. Market let's a few tech companies act as if they were private (try to maximize long-term value at the expense of short-term profits).

 

Long term value putting a squelch on short term noise (sounds like my kind of business manager...)

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Costco might be considered as generating float as the payment terms of distributors is 30 days after the goods are received in the stores. Goods are almost always sold in less than 30 days.

 

Amazon, is also know for having negative working capital.

 

Testing labs (ETL, UL) also have very good economics with 70% payment before the work is done and 30% once completed.

 

Some would say that float is a wonderfull thing because it give free credit but I think it's the other way around. Free credit is only worth what the interest rate (1-2% these days for corporate bond yield). Nothing to go crazy about. Instead I believe that usually companies with float have a pricing power over their suppliers and customers that allows them to have favorable payment terms.

 

Regards

BeerBaron

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Ref. the starting post by DooDiligence,

 

I would certainly add [certain] banks to the list.

 

I remember reading a shareholder letter by Mr. Dimon for JPM about the deposits of JPM during the financial crisis, which acually stayed stable during the crisis [08' letter issued in '09 or 09' letter issued in '10]. It was basically about "the safe harbour for cash" when shit hits the fan, based on the stability and solidity of the financial institution in a downturn.

 

I also remember listening to an interview of Mr. Buffett some years ago [Mr. Buffett in a red Allen sweather], where Mr. Buffett was asked about JPM compared to WFC, where Mr. Buffett replied, that he did consider WFC a better bank compared to JPM [at that time, naturally], based on terms of deposits [thereby meaning terms of float].

 

To me float is just capital, that you owe somebody, but capital that you have control of, and thereby have the opportunity to work with. For my part, I have moved a lot of capital [relatively] between Santander Consumer Bank ASA and Bank Norwegian ASA during 2016 to take advantage of marginal interest rate differences in the market over time. [A few clicks on the keyboard over a couple of days - almost work free].

 

The cost of float for Santander Consumer Bank ASA and Bank Norwegian ASA is negative, but their interest income on what they do with the money by far more than compensate for that [if they continue to do well with their lending and do not screw up].

 

- - - o 0 o - - -

 

Several Danish banks have now implemented negative cost of float for firms and companies [not private households] with excess cash over a certain limit: Danske Bank, Nordea, Spar Nord.

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License agreements are generally 2-3 years, cash up front (net 60 days)

 

They charge all 2-3 years in advance? Or annually?

 

The drawback of the SAAS companies is that they are investing heavily in Customer Acquisition Costs. So the float dynamics are burdened by the customer acquisition costs. Assume you spend $1500 to acquire a 3 year contract at $500 per, billed annually in advance. Technically, the float would be $500. But in reality, net cash is -$1000.

 

 

Depends on the company and the sales policy. Many are "term" licenses, 2/3 yr, paid up front. Some are same term, but paid annually. Need to get from the 10-K. I think almost as important is the renewal rate, which gives great predictability.

 

The customer acquisition costs are the same as the guys selling perpetual licenses just like in the old days. Field commission rates are the same. It's just that the maintenance is bundled into the term license and license (rental portion) is recognized month by month. On the Perpetual licenses, all the license fee is recognized up front, leading to these huge hockey stick quarters, especially

Q4, where you are on pins and needles waiting to see if they will make their numbers.

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License agreements are generally 2-3 years, cash up front (net 60 days)

 

They charge all 2-3 years in advance? Or annually?

 

The drawback of the SAAS companies is that they are investing heavily in Customer Acquisition Costs. So the float dynamics are burdened by the customer acquisition costs. Assume you spend $1500 to acquire a 3 year contract at $500 per, billed annually in advance. Technically, the float would be $500. But in reality, net cash is -$1000.

 

I'd say that's a feature, not a bug. Having float is meaningless if it's sitting in the bank account earning 0.1%... you want to reinvest it and earn good returns on it.

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Hey all:

 

Some computer companies have/had float.

 

Back in the day, Dell would get an order and get paid immediately OR almost immediately.  They would then have some amount of time (20-30 days) before they had to pay the supplier (Intel, Seagate, Micron, Western Digital, Nvidia, etc).

 

The real value of this was that it allowed them to scale up their operations very quickly without having to raise a ton of capital and dilute shareholders.

 

Dell would buy the parts only after they got the order and got paid...

 

Not sure if this is the case today.

 

 

 

 

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Hey all:

 

Some computer companies have/had float.

 

Back in the day, Dell would get an order and get paid immediately OR almost immediately.  They would then have some amount of time (20-30 days) before they had to pay the supplier (Intel, Seagate, Micron, Western Digital, Nvidia, etc).

 

The real value of this was that it allowed them to scale up their operations very quickly without having to raise a ton of capital and dilute shareholders.

 

Dell would buy the parts only after they got the order and got paid...

 

Not sure if this is the case today.

 

That "just in time for delivery" model, at scale, must have had a lot of PC makers smacking themselves in the forehead...

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