As we head into the 2011 business year we're clearly coming out of a time when for many firms such as yours sales were down, margins eroded, and most importantly cash flow financing seemed to dictate where your firm was heading from a success point of view. So how can you assess how profits and growth can be managed from a viewpoint of cash flow financing.
The answer - your scorecard! What do we mean by that? Simply speaking knowing where your working capital is tied up, and what is the cheapest method of unlocking sources to cash flow financing. And, although it's a surprise to our clients more often than not, 'cheapest' doesn't necessarily mean ‘whats my interest rate'.
Can you point to your working capital? We can. It's tied up out back, in the form of inventory, receivables and equipment you've invested in, via fixed assets.
So business owners can hopefully start to see now that the secret or ‘holy grail' to that unlocking of cash flow is freeing up cash you've got tied up in those assets. We will point out as a side note that you also have to manage those assets for prompt turnover - that comes with billing promptly, collecting receivables when they are due, and ensuring you have financing mechanisms in place, if you need them, for inventory and equipment.
Many business owners don't realize that the inventory and equipment can be turned into sources of working capital. Those two assets can be combined as a part of a working capital operating facility, which for larger transactions is known as an asset based line of credit .
The hallmark of being able to finance working capital, more often than not, is managing your receivables. We can categorically say that although the majority of clients have 30 day terms to customer's typical collection periods actually seem to be 60 and, yes, even 90 days.
How can you monetize that critical asset? In a perfect world (by the way its not) you access receivable financing via your bank. That comes with obligations though, including your need to maintain clean financials, show a profit, and meet ratios and covenants. So it's agreed. What's plan B!
Plan B can also bring you closer to finance working capital solutions. Plan B could involves the following - securitizing your receivables if you are a mediums size or larger firm. Smaller firms and start ups and monetize A/R via selling their receivables, taking them off the balance sheet, and receiving cash flow today that can be re invested in the business. Terms for this type of financing are invoice discounting, factoring, confidential invoice discounting, etc. If your firm has decent gross margins, good clients, and can you're able to increase sales and profits by having additional cash on hand these solutions are for you.