Financial Solutions for cash flow optimization

Cash flow impacts the entirety of any company, as we all know.

In order to remain a player in the business, you need to have enough cash on hand to pay your suppliers, labor costs, and other expenses when they’re due. Most businesses fail because of cash flow issues, which is why you need to prioritize optimizing your liquidity. One of the easiest ways to do this is with a cash management solution.

A cash management solution allows you to have sufficient money when you need it for the smooth functioning of the operations.

By considering these financial solutions, you’ll be able to make strategic decisions, follow through on operational plans and most importantly, shorten your cash cycle.

  • Don’t wait for customers to pay their invoices. Instead, get paid now and outsource your collections to a reputable company.
  • Extend your purchase terms so you have more time to pay your suppliers.
  • Leverage the assets in your company, like inventory and equipment, to secure financing that a traditional bank couldn’t provide.

Reinvest cash back into your company without having to wait under traditional terms and timing that can hold you back from growing the business faster.

Solution 1:

Turn customer’s invoices into cash

By using “factoring” which is also called “accounts receivable financing” or “invoice discounting,” you can reduce your DSO to as short as one day. It almost wipes out the obligation to wait on your customer invoice payments.

Remember that a lower DSO is always the best and should be preferred. Getting paid in a timely manner for your customer invoices will allow you to put that working capital back into your company for things like new inventory purchases and making payroll.

As an added bonus, many businesses find that their factoring costs are tax deductible. It’s important to have your experienced tax advisors review your factoring agreement and ensure your reporting is accurate and maximizes your returns.

Let’s look at the below example which is based on “Factoring”:

Shubhi runs an industrial supply company and she always pays her supplier within 30 days. She keeps enough inventories on hand to satisfy 60 days of sales and is good at managing this. It will take 52 days on average for her customers to pay their invoices.

Shubhi now decides to work with her Liquid Capital Principal to “factor” her customer invoices, as she needs to order a batch of inventory. The aim is to fulfill a huge new product order. The next few months can be crucial for the working capital if immediate action isn’t taken. When factoring is used, she receives payment in 4 days. On her behalf, liquid capital principal collects the payment.

Original CCC
CCC = 60 – 30 + 52
CCC = 82 days

Using Accounts Receivable Financing
CCC = 60 – 30 + 4
CCC = 34 days

The CCC is improved by 48 days.

Solution 2:

Leverage equipment, inventory and real estate

Asset-based lending (ABL) allows you to leverage your inventory, equipment and real estate along with accounts receivable. This results in more working capital. Based on your solid credit-worthiness and assets, your commercial finance partner will provide you funds in higher amounts than just accounts receivable financing alone could provide.

ABL is cost-effective, very flexible and discreet. The processes with your customers remain the same and you can instantly access a significant amount of working capital. 

Example: Leveraging inventory to improve working capital

Rahul is the head of an equipment manufacturing firm which owns a huge operating facility and a warehouse. They also have an office building and manufacturing plant. The financial reporting system of the firm is well in place and averages 90 days for collection and 60 days foe their account payable.

Now, the sales team is expecting to sell off the existing inventory in the warehouse within 45 days. The challenge which comes into picture here would be the capital crunch for all the additional supplies which are required for the production to ramp up.

Hence, Rahul works with his Liquid Capital Principal to leverage their manufacturing equipment along with their existing receivables to secure a financing agreement. This way, the deal gets finalized and now Rahul gets the needed funds to purchase required supplies.

Let’s understand this with the below example:

Original CCC
CCC = 45 – 60 + 90
CCC = 75 days

Using ABL
CCC = 45 – 60 + 25
CCC = 10 days

The CCC is improved by 65 days

Using ABL, Rahul’s cash flow cycle is dramatically shifted, freeing up resources so their new deal can go through. He was able to access such significant capital by leveraging the company assets in combination with his accounts receivable.

Solution 3:

Improve Supplier Relationship and cash flow together

In some instances, suppliers demand the money in advance for the orders or right on the day of delivery. There are probable chances that you might not have the cash to pay at that point or at least a letter of credit. What would be your next thought?

When your DSO is 60-90 days and DPO is zero, it depicts a huge working capital gap. At this point, you need to manage the operating costs of business and also keep expecting cash to come in.

Purchase Order Financing is something which helps you reduce and eventually close the gap where suppliers are not providing any terms to pay money. By extending the number of days to pay your accounts payables helps you increase working capital and retain cash reserves.

Often, PO Financing works alongside factoring so the business can take advantage of both solutions at once.

Let’s understand this better with the below example:

Example: Financing the product cost

Mohan and Sons have been running their online retail store from the past couple of years. They deal in sales of truck and car accessories to the enthusiastic custom car community. Now, the major concern they face currently is shipping since their suppliers are scattered across India and overseas. The business is certainly growing but the cash flow is not in a good state. The alignment between payments, orders and suppliers payments isn’t set up well.

Currently, their main overseas supplier needs payment at the point of shipment for a relatively huge quantity. Now Mohan and Sons find themselves cash-strapped since the goods are on a boat and are considered sold to them. They’re in dire need to get the parts in their customers’ hands, as customer invoices usually take at least 35 days to be paid.

Fortunately, they have major customer orders with supporting POs, and Liquid Capital assists by supplying a letter of credit to the supplier. Liquid Capital finances the Mohan and Sons product costs until the order is delivered to the customer, which takes 12 days to arrive. They’ve secured not only payment but breathing room. And by factoring their receivables, they’ll now only have to wait 5 days to see cash flow improve from their customer invoices.

Original CCC
CCC = 60 – 0 + 35
CCC = 95 days

Using PO Financing
CCC = 60 – 12 + 5
CCC = 53 days

The CCC is improved by 42 days

With PO financing alone, the Gregory brothers shorten their cash cycle by 12 days. If they also take advantage of factoring their customer invoices, they could shorten by 32 more days, so their cash cycle is dramatically shortened. That’s a big difference from the 3-month timeframe without financial support.

Don’t miss out on Suppliers’ Discounts

At some point of time, every business goes through a business deal that’s very lucrative but is on the short term for payment or no probably no terms in the worse case.

In such times, working capital becomes crucial and one needs a quick solution to get it.

Like, for example, if your supplier community offers a great deal of a bulk-sale for a limited time, you can opt for Purchase Financing Program (PFP) to avail that deal. That way, you aren’t required to be all set with the working capital to finance the cost of payment. The day to day operations of the business will also remain impact-free.

This doesn’t tie up any working capital to finance the cost of the payment so you can keep your day-to-day operations intact. PFP is a very attractive solution for companies that already have a strong credit rating but may have maxed out their bank loan options, or need a faster solution.

No matter where your supplier is located, your in-transit inventory can be financed.

That inventory can be goods for resale, inventory or consumption. You receive the goods then pay the PFP invoices as agreed. It’s that simple.

Example: Getting a great supplier deal

Sharma Preserves which is now run by Amit Sharma is a 30-year old family-run business. It boasts of having great sales record, a well-set suppliers’ community and a dedicated customer base. It’s currently quarter-end when Sharma pay payroll bonuses and other expenses. The primary supplier at the same time presents a great discount offer on the overstock of canning supplies. So what’s the big deal here? Well, the supplier needs the payment on Cash on delivery (COD), and its first come, first served. (FCFS)

Sharma holds inventory for an average of 14 days before shipment, has a standard net-30 day payable terms and gets paid on average after 60 days. If they accept the discount deal, they’ll arrive at severe cash crunch after paying out all the bills.

Sharma calls up their Liquid Capital partner to use the Purchase Financing Program and snag this supplier deal while it lasts. Liquid Capital pays the supplier directly, deferring Sharma’ payables outstanding for this transaction to 30 extra days, giving them time to gain working capital from other sales.

Original CCC
CCC = 14 – 0 + 60
CCC = 74 days

Using the Purchase Financing Program
CCC = 14 – 30 + 60
CCC = 44 days

The CCC is improved by 30 days

In the above example, Sharma got an additional 30 days of breathing room to cater the expenses on their supply deal. By taking advantage of the discount, their production expenses were decreased and profits increased.

Opt for the technique which works best for you among these and witnesses your cash flows reaching a new height each day.

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