Ask ten different businesses this question: What is your biggest problem in current times? - and the unanimous answer will be: “Managing working capital!” with good reason.
Regardless of the size of the business, the cash crunch is being felt by every business, putting them under pressure. To add to this, banks are also hesitant to sanction loans or to refinance while other lenders have stringent policies.
It is no longer easy to access cash from the conventional sources and to rub salt on this already hurting wound, debtors also insisted on extended payment to 56 days. Dun & Bradstreet article dated June 9, 2009 “Business investment will continue to fall” at http://dnb.com.au/Header/News/Business_Expectations_Survey_June/indexdl_4910.aspx shows a gloomy outlook for the September quarter 2009.
While everyone understands that working capital forms the lifeblood for any business its importance is seldom realized unless there is a dire emergency. It is not enough for a business to have sufficient assets, but insufficient cash flow, particularly in a slow economy because this will force the company to sell its assets to raise cash just so they can stay in business.
Is there a solution to this? There is - provided the business manages its cash flow cleverly. In particular, this means debtor management by anticipating a cash flow crisis and having an alternate funding solution handy. Business must look at factoring http://en.wikipedia.org/wiki/Factoring_%28finance%29 and invoice discounting seriously to take advantage of the benefits of easy access to finance, better cash flow control and consequently, better flexibility.
It is a fact that working capital management is a daily activity to provide the business with enough funds to ensure that its needs are met seamlessly. After enjoying a consistent upward trend for a prolonged period, managers need to refresh their knowledge and realize that the best source of working capital could be from within the business.
This is hardly far-fetched if you think about factoring and invoice discounting. Of course, you have to take the business’s objectives into account as the funds raised may still not be sufficient to take care of the business’s working capital needs.
The answer is alternative financing solutions in the form of overdrafts, factoring and invoice discounting. While overdrafts are fine for businesses whose cash flow is stable, the costs can be quite high. Invoice discounting is a good source of working capital, as it is beneficial to both the customer to make prompt payments, and to the business, which can use the capital.
Factoring also improves cash flow in the same way and there’s a major advantage here, because you don’t have to take the risk of offering security in the form of real estate. As solutions that free up working capital from the business’s receivables, businesses would do well to consider using factoring and invoice discounting to manage their cash flow wisely.