For any business, managing cash flow is always a tricky problem as firms try to ensure prompt payments from their clients and for their suppliers. Fortunately, thanks to the rise of alternative financing, it is now even easier for businesses to manage their cash flow. From invoice discounting to supplier finance or even a combination of several financing options, there are more ways than ever to get total control over your capital.
Working capital cycle explained
For better cash flow, the focus for businesses should be to shorten the working capital cycle as much as possible. Put simply; the working capital cycle is the length of time it takes to turn your assets and liabilities into cash. The longer the cycle, the longer it takes to earn a return, therefore tying up your capital. The shorter the cycle, the quicker your business has access to cash.
With the aim of shortening the working capital cycle and improving cash flow, you want to ensure that your repayment terms are reasonable, but as short as possible, so that your business is not waiting a long time for invoices to be paid. However, you can also help to reduce cash flow pressures by revising agreements with creditors to give you an extended period to pay. This will provide you with as much time as possible to get money from debtors without impacting your cash flow.
So, what can your business do to improve the working capital cycle and thus make cash flow easier to manage? The answer lies in invoice discounting and supply chain finance.
What is Invoice Discounting?
Invoice discounting allows you to free up funds from your sales ledger, so you don’t have to wait for your debtors to pay you. All you have to do is upload the customers or invoices that you want to free up the cash from. The invoice discounting provider will then release money from these invoices, effectively drawing down the money that you are owed from your invoices without waiting for your debtors to pay.
There are many benefits to using an invoice discounting scheme. However, perhaps the most attractive aspect is this scheme is not borrowing more than you can afford. Instead, it only releases funds that you are already owed. The scheme can be incredibly flexible, so you only have to use an invoice discounting function as and when you need it.
Another significant benefit is how fast you can set up invoice discounting and receive funds. Once set up, the process is simple; all you need to do is upload the necessary invoices to the easy to use platform.
What is Supply Chain Finance?
Another way to improve cash flow is through supplier finance. supply chain finance works by using a provider to pay your suppliers early, so you can then extend the payment terms, so you have more time to regroup your funds.
This can be extremely beneficial for suppliers who offer early payment discounts. By using supplier finance, you can benefit from this discount even if you don’t have the working capital to hand. Your supplier finance provider essential can bridge the payment gap giving you more time to retrieve money from debtors to pay your suppliers.
Supply chain finance can help to reduce the risk in your supply chain while strengthening relationships with suppliers. Furthermore, supplier finance is incredibly flexible; you can choose early payments for as many or as few suppliers as you wish.
A match made in heaven?
For businesses looking to totally optimise their cash flow, using supplier finance and invoice discounting together helps to improve the speed of the working capital cycle while also providing leeway to extend payment terms when needed.
Supply chain finance requires no personal security or company security, it can sit alongside other facilities such as invoice discounting, giving businesses the chance to improve cash flow allowing businesses to recoup funds quickly, while extending payments terms to suppliers as and when it’s needed.
While invoice factoring and invoice discounting are widely used for improving cash flow, supply chain finance is relatively unknown. However, by using supply chain finance alongside other alternative finance methods, it gives businesses the opportunity to take control over cash flow and improve the working capital cycle.