When financial resources are finite, it can be difficult for businesses to determine how much to invest in growth, and how aggressively to pursue opportunities that present themselves. Driving innovation and product development, hiring and training new workers, expanding facilities, and other costs of growth ultimately draw on working capital that is needed elsewhere.
A business’ production capacity is limited by the funds it can immediately invest in supplies and labour. By diverting funds to longer term growth efforts, businesses can temporarily lose the ability to fill large-volume orders. If this is combined with a cash flow interruption it could disrupt the business’ operations. To limit this risk, businesses are using a combination of supply chain finance and invoice finance to fully finance their operations, allowing them to focus their working capital on driving structural growth.
Fully financing your operations
In order to free up all of your working capital for growth purposes, a business first needs to find a way to fully finance its operations. To do that, it needs to reduce what is known as its cash conversion cycle (CCC) to below zero. This means reaching a point where revenues are collected by the business before paying for the inputs that were required. While long supplier payment terms can go a long way to achieving this, many businesses can’t get good terms at reasonable cost, and those who do most often still need more time. Supply chain finance and invoice finance give your business the time it needs.
Invoice finance brings revenues in sooner
Invoice finance is a financing tool that allows businesses to get paid sooner than their payment terms dictate. Instead of waiting for a customer to pay an invoice on or after payment is due, the business can finance it through Capitalise Business Finance as soon as it is issued. Effectively, businesses can collect the revenues they need to pay bills and fund their operations at the time that customers are invoiced, instead of when customers pay that invoice.
Supply chain finance delays outgoing payments
Supply chain finance addresses the other side of the cash conversion cycle equation, by delaying the time at which businesses are required to pay for inputs. Instead of paying suppliers directly, a financier pays, and repayments to the financier can then be delayed by up to 90 days, giving businesses the time they need to turn those inputs into products and services, and to make a sale. As long as they can invoice the respective customers that buy any given product before those 90 days are up, their cash conversion cycle will be below zero, meaning their operations can be financed entirely using this process.
How closing the CCC enables growth
Financing operational costs frees up the capital that was previously tied up in simply making the business run. Instead of focusing your efforts almost entirely on production, you can then apply those funds to growth instead. Whether that means setting up a research and development team to drive innovation, hiring and training new employees, acquiring new floor space and equipment, or building a first rate sales and marketing team, financing is ultimately what makes it possible for businesses to invest both in their current operations, and their future.
Understanding your current and projected cash flows is the first step in minimising costs and maximising your business’s growth potential. Our free cash flow forecasting tool (excel template) will help you manage your cash flows, plan for growth, and respond quickly to changes.
Would you like more information, or to talk to us about your cash flow challenges and how you could overcome them? Click the link below to connect with us.
