Why maintaining a positive cashflow through invoice financing can benefit your food enterprise.
Table of Contents
- What is working capital?
- Ways to increase working capital
- How does invoice financing factor into working capital?
What is working capital?
Working capital is a balance sheet term that sheds light on a company’s liquidity. Essentially, it encompasses the financial capital to which a business is entitled but cannot necessarily access immediately. It is calculated by subtracting a company’s current liabilities (account payable, expenses) from its current assets (accounts receivable, cash).
The flow of cash is measured via the cash conversion cycle (CCC): from the initial investment in manufacturing and storage of a specific product all the way through the sale and cash inflow. Within this process, there is a so-called cash turnover period – this describes the timeframe in which your financial capital is at your disposal. If your business’s working (i.e. financial) capital exhibits a positive metric, you can use the positive cash flow to invest in long-term assets. If, however, the metric is negative, you may struggle to grow your business, fulfil financial obligations, or in a worst-case scenario, even face bankruptcy.
According to a recent study conducted by the DHIK, as a direct result of the pandemic, over 40% of enterprises in Germany struggled to maintain their liquidity. This has given rise to a newfound understanding of the importance of maintaining and increasing working capital.
Ways to increase working capital
In a nutshell, three main measures to increase your working capital are as follows:
Minimising your inventory wherever possible
Maximising your cash inflow by collecting sales up front
Minimising your cash outflow by delaying payments to partners
The first is a no brainer: rather than driving up your accounts payable, try to minimise spending by limiting inventory to necessary numbers and volumes. Food the food industry, in particular, large inventories pose a certain risk because food that isn’t told will expire and then go to waste.
The second is perhaps where it gets a bit more tricky, as you need to find ways to ensure that your customers pay as quickly as possible. For food manufacturers, this means negotiating shorter payment terms with their buyers. In Germany, for example, it is not uncommon to offer a so-called Skonto, a discount by which the buyer gets a price reduction if they pay within a certain (shorter) timeframe.
The third is a question of finding solutions to postpone payments, and this is precisely where invoice payments come in. Suppose you are a small business or just starting out in the industry. In that case, it can be especially tricky to negotiate longer payment terms as neither your suppliers nor banks will likely be very willing to give you the benefit of the doubt and sacrifice their liquidity to lend you a hand. At the same time, you get your business up and running. Not to mention the high price tag (interest rates) they will attach to any loans they do give out.
How does invoice financing flow into working capital?
By opting for invoice payments, we help you kill two birds with one stone: we ensure that your suppliers are paid upfront while prolonging the payments you have to make by a certain timeframe.
The process is simple: we take out a loan from a financing provider, and based on the amount(s), you pay the financing provider back within X number of days. This allows you to maintain a positive cash flow and thus improve your working capital. In turn, you are able to continue building and growing your business more effectively.
It should be noted that invoice financing is not the same as invoice factoring. The term invoice factoring refers to a process by which a provider buys your unpaid invoices and then uses them as assets to collect the cash from your customers.