Cash management optimization as a funding source for businesses


If you’re evaluating your funding sources for that next big project, it’s tempting to look externally first. The range of options to raise money is vast – from a traditional business loan, to selling shares, bonds or even crowdfunding your next growth phase. But, in essence, most business funding involves external lenders and their associated interest rates.

However, most businesses are sitting on an untapped opportunity for funding: working capital tied up in their cash flow. This may initially seem like a bizarre suggestion for short-term funding, as financial leaders may be more familiar with cash flow management to ensure liquidity and prevent cash flow problems, rather than turning to this as a potential funding source. But you don’t want to limit yourself to thinking traditionally, do you?

How funding challenges for small businesses can inspire innovation

Even large enterprises can learn something from the financial challenges faced by small business owners. Whilst your funding options and lines of credit may be plentiful, spare a thought for start ups and small businesses; less than 5% of start ups are able to raise venture capital. And according to a 2019 Federal Reserve survey, barely half of the small firms that applied for financing received the full amount they sought.

With limited external financing options, many small businesses look at how they can optimize cash flow to free up extra cash for liquidity and investment for growth. This can be as simple tweaks to their cash conversion cycle to drive down days sales outstanding (DSO), by encouraging early payment, or slowing cash outflows through increasing days payable outstanding (DPO).

Entrepreneurs and small businesses need to use every trick in the book to improve their liquidity position, so much can be learned from their hard work and innovation. Cash flow optimization on the scale of a small business only tends to make incremental improvements, enough money for marginal improvements to growth, but the same principles can be applied with more dramatic results for larger businesses.

Liberating working capital

A phenomenal amount of money is trapped in working capital. It’s not uncommon for contracts to stipulate 90 days payment terms in some industries and regions, and this is before any payment delays are encountered by accounts receivable. Average DSO now sits at 98 days, with a DSO increase of 94 percent in the last year for Western European businesses, according to Atradius.

It’s not hard to see why accounts payable departments may want to delay payments, impacting DSO. Every extra day they can hang on to your cash, improves their liquidity. However, this doesn’t mean there aren’t ways to drive down DSO for a healthier balance sheet.

If a business with £100m turnover experiences an average DSO of 57 days, it has an opportunity to reduce this and extract the equivalent value from the receivables ledger. By dropping its DSO by just one day, the business could immediately liberate the equivalent of £274k.

However, imagine dropping 57 days DSO down to 15 days! Reducing DSO so significantly would liberate the equivalent of £11.5m in cash. That’s capital that would otherwise have been sitting in the receivables ledger, supporting customers by extending them an interest-free line of credit.

How to optimize cash flow with respect to customer relationships and your supply chain

With the amount of cash tied up in working capital, it can be tempting to prioritize the business needs for cash above your customers’ preference for lengthy payment terms. However, customer relationships may depend on favorable business terms, just as your business may need the lines of credit afforded by your supply chain partners.

There are solutions to hand though. In fact, the more cash you have tied up in working capital, the more potential you have to leverage this as a funding source.

Solutions such as Managed Accounts Receivable (Managed AR) from Corcentric offer a non-recourse way to extract immediate value from your AR ledger. Corcentric can take on your full ledger, or sub-ledgers, and work as an extension of your AR team to manage invoicing and collections (allowing your customers the lengthy payment terms they want), but you get the cash (minus a small service fee) up-front, within your preferred payment timeframe.

For instance, it’s perfectly possible to take your DSO down from 37 days to just 15 days, as per the example above. In fact, this is exactly what we do for Daimler (except their turnover is considerably more than the £100m example above).

So, that’s how to turn your DSO into a funding source, optimize cash flow and keep your customers happy. A similar approach can also be taken to support an extension of days payable outstanding (DPO), through Corcentric’s Managed Accounts Payable service. This can support the need to agree to shorter payment timeframes when procurement negotiates contractual terms with suppliers, without leaving you short of cash as a result. Find out more about the role of procurement services in optimizing cash flow here.

As a non-recourse service, Corcentric Managed AR removes the risk to your bottom line from bad debt. Unlike with most invoice factoring, or invoice discounting, solutions, there is no obligation to cover customers who default on their payments. Funding via your AR ledger is not contingent on timely customer payments, nor does it incur any interest, it’s simply a way of getting access to your cash sooner.

Cash flow forecasting

As every CFO and treasury manager can tell you, the ability to accurately forecast a company’s cash flow is critical for the financial health of the business. With the best accounting software in the world, you are still at the whim of customers for your cash inflow. Ensuring you have enough cash to meet your liabilities and operating expenses, and have enough left over to invest for growth, is a weight on every financial leader’s shoulders.

Including services like Managed AR in your business plan is one way to ensure liquidity beyond the ups and downs of operating cash flow. The assurance of having invoices paid within a specific timeframe removes the risk of late payments impacting cash flow, allowing accurate cash flow forecasting month-to-month.

In a recent study conducted by Forrester Consulting, on behalf of Corcentric, cash flow optimization was the most commonly sought solution to this challenge.

Find out how financial leaders perceive the automation of AR and AP processes, and holistic cash flow forecasting as routes to unlock funding for key initiatives. And find out how far off businesses are to implementing these.

How to move forward with cash flow optimization as a funding source

If this article has made you curious about the options for managing cash flow to fund your next project, feel free to contact us to find out more. We believe businesses should be able to unlock the value of working capital as a funding source, rather than relying on their bank account or external investment to take the strain.

Join us for one of our webinars on the topic of fixing DSO and releasing trapped cash, or take a look at how we’ve done this for Daimler and other clients in our case studies. We look forward to helping you fund that next project!

Download the study The Future of Finance: 360-Degree Cash Flow Visibility and Control to find out more.