cash cycle ABL

Leverage Your Assets to Grow Your Working Capital

cash cycle ABL

82% business failures are due to cash flow problems, according to a U.S. bank study. If your company is spending more money than it’s currently bringing in, you likely have a cash flow problem. It’s very common with the majority of businesses and can signal immediate changes are needed.

For well-established companies with good financial reporting systems, another option exists for improving cash flow and lowering your “cash cycle” – commonly referred to as your CCC. That means you can turn inventory into cash faster, have more liquid cash on hand and grow your business faster.

One financial solution called Asset-Based Lending (ABL) could be a bright solution for your company. Skip ahead if you’re ready to learn more about ABL now.

Quick Recap: What is the cash cycle?

The cash conversion cycle (CCC) tells you how many days it takes for your company to turn your inventory purchases into cash – a strong indicator of your company cash flow. The CCC also helps lenders and other financial providers assess your potential risk level.

Through a fairly simple formula, you can calculate your own company’s cash cycle. The CCC is equal to the number of days it takes to sell your inventory, plus the number of days you need to collect on your sales, minus the days it takes you to pay your vendors.

CCC = DIO – DPO + DSO

DIO Days Inventory Outstanding The average number of days it takes your company to turn inventory into sales. A lower number is better.
DPO Days Payable Outstanding The number of days it takes you to pay your accounts payable. The higher this number, the longer you can hold onto cash. A longer DPO (higher number) is better.
DSO Days Sales Outstanding  The number of days you’ll need to collect on sales of that inventory after the sale has been made. A lower number is better.

 

ABL can dramatically reduce your cash cycle

Asset-Based Lending (ABL) could be your answer, especially if you don’t currently meet bank loan criteria or if you have seasonal and time-sensitive capital requirements.

There are many advantages to ABL. First, it is one of the most option-rich financing alternatives available and allows you to leverage your inventory, equipment, real estate and accounts receivable to secure funding. For larger companies that have strong credit ratings and valuable assets, ABL offers you access to more working capital than many other funding products since it’s based on a percentage of your assets. It could even offer funding as high as $10 million.

ABL is also cost-effective, very flexible and discreet – something that most large companies value. You don’t have to change the invoicing process with your customers, and you can almost immediately access a significant amount of working capital.

How does this impact the cash cycle? By securing ABL funding, a company will effectively reduce their DSO (Days Sales Outstanding) and effectively reduce the number of days it takes to turn their inventory into cash. The company no longer has to wait the full time to collect on their sales, since the ABL delivers that capital much faster.

Example: How ABL can work for companies in real life

Clarence is the CFO of a tool manufacturing enterprise that has a large operating facility including a warehouse, office building and manufacturing plant. He prides himself on their impeccable financial reporting, and averages 60 days for their accounts payable, and 90 days for collections.

The Sales team is working on a huge deal to sell existing inventory in their warehouse, and expects to close that within 45 days. Another big deal is on the horizon that will require the production to ramp up, but cash flow is tight and Clarence needs to find capital to buy all the additional supplies that will be needed.

So he works with Liquid Capital to leverage their manufacturing equipment along with their existing receivables to secure a financing agreement. Liquid Capital approves the deal and advances them the required $2 million in funding 25 days later, taking over their existing receivables. The new deal goes through and Clarence approves the purchase of the required supplies.

ORIGINAL CCC USING ABL
CCC = DIO – DPO + DSO CCC = DIO – DPO + DSO
CCC = 45 – 60 + 90 CCC = 45 – 60 + 25
CCC = 75 days CCC = 10 days

Improved CCC by 65 days

Through Asset-Based Lending, Clarence’s cash flow cycle is dramatically shifted, from 75 days to just 10 days. By freeing up resources, he’s now certain their new deal can go through.

In this example, Clarence was able to access such significant capital by leveraging the company assets in combination with his accounts receivable. For companies in similar situations, it’s worthwhile learning about your options and comparing them against other financing alternatives. By making the most of your options, you could access up to $10 million from Asset-Based Lending with Liquid Capital.

 

Get more information on the cash cycle, how to calculate it and strategic tactics for your company:

Part 1: How to Determine Your Company’s “Cash Conversion Cycle”

cash cycle

Part 2: 7 proven cash flow tactics every CFO needs to know

CFO cash flow

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