PO Financing can ensure your suppliers deliver — and improve your cash flow!

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Part 4 in the Cash Cycle series: Get the inventory you need faster with PO Financing.

For business owners, nothing quite beats the thrill of securing a new — and big — order. Ring that sales bell! But your excitement can extinguish the moment your realize there isn’t enough supplies or inventory on hand to deliver (even if you’re ready to start production.) You may jump to place a rush order with your supplier, but what if they need you to pay in advance or at the point of shipment?

Many companies don’t have the working capital to pay up front. And some can’t get a letter of credit so they can start the order. Will your supplier ship your goods? 

If you’re getting more orders than your available working capital can support, then PO Financing could help you cover the cost of product in transit.

How PO Financing works

PO-Financing

Leverage this powerful short-term financing tool designed to help your business grow. Ready to learn about the top three benefits of PO Financing? Keep reading!

PO Financing benefit 1: Increase your available working capital

Purchase Order Financing (PO Financing) helps you close the gap where suppliers are not providing adequate – or any – terms. By extending the number of days you have to pay your accounts payable, you can keep cash in the company and effectively increase your working capital. This financing option will also improve your cash flow, and your cash conversion cycle (CCC), which can help you meet supplier terms.

PO Financing benefit 2: Keep cash flowing through your business

In normal circumstances, you might have to wait 30, 60 or 90 days to collect on your sales (DSO = 30, 60 or 90). But a supplier may demand that you pay immediately before they will release your shipment (DPO = 0). If you don’t have significant working capital on hand, this leaves a serious gap. (More on these figures in a bit.)

As you’re stuck waiting to collect on your invoices, you’re still managing the ongoing costs of running your business and your shipment might not be released. Unfortunately, you’ll never be able to meet supplier terms without finding an alternative solution.

PO Financing benefit 3: Combine with invoice factoring for even more cash flow flexibility

PO Financing can extend your cash cycle and help get your product shipped. When you receive a PO from your customer, you place that with your supplier. As your financing partner, Liquid Capital would then provide your supplier with a letter of credit and they would release the shipment. Your customer invoice is then generated.

With PO Financing, businesses often use invoice factoring to obtain faster payment on their customer invoices once they are generated, so that they can take advantage of both solutions at once.

Example Scenario: Financing the cost of the product 

PO-Financing-example

The Gregory twins have been running their online retail venture the past couple years, selling car and truck accessories to the enthusiastic custom car community. Their suppliers are located across North America and overseas, so shipping is a big concern for the duo. Their business is growing, but their cash flow is still struggling. It’s tough to get supplier payments, orders and payments to align.

Currently, their main overseas supplier requires payment at the point of shipment for a large order ready to leave. Once the parts are on the boat, they’re considered sold to the Gregory twins – and time begins ticking – but the duo are cash-strapped and can’t pay the entire invoice. They’re in dire need to get the parts in their customers’ hands, as customer invoices usually take at least 35 days to be paid.

Fortunately, they have major customer orders with supporting POs, and Liquid Capital assists by supplying a letter of credit to the supplier. Liquid Capital finances the Gregory twins’ product costs until the order is delivered to the customer, which takes 12 days to arrive. They’ve secured not only payment but breathing room.

And by factoring their receivables, they’ll now only have to wait 5 days to see cash flow improve from their customer invoices.

 

CCC BEFORE PO Financing CCC AFTER PO Financing
CCC = DIO – DPO + DSO CCC = DIO – DPO + DSO
CCC = 60 – 0 + 35 CCC = 60 – 12 + 5
CCC = 95 days CCC = 53 days

Improved cash cycle by 42 days

    (Get the full cash cycle formula and descriptions here.)

What is the end result?

With PO financing alone, the Gregory brothers shorten their cash cycle by 12 days. That means they will convert inventory into liquid cash almost two weeks faster.

If they also take advantage of factoring their customer invoices, they could shorten by 30 more days, so their cash cycle is dramatically shortened. That’s a big difference from the three-month timeframe without financial support.

 

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 conversion cycle

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

Cash flow tactics for CFO

Part 3: Leverage your assets to grow your working capital

Grow your working capital

About Liquid Capital

At Liquid Capital, we understand what it takes for small, medium, and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital you’re talking directly to your funding source and a fellow business person.

Grow your working capital

Unleash the powerful value of your assets to grow your working capital

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Part 3 in the Cash Cycle series: Don’t sacrifice your goals. Grow your working capital and regain control of your cash flow with asset-based lending.

Grow your working capital

Now more than ever, businesses are realizing the impact their cash flow has on their market resilience and longevity. According to one study, 82% of business failures are due to cash flow problems.. 

If your company is spending more money than it’s currently bringing in, you likely have a cash flow problem. This is a common issue for the majority of businesses and can signal that immediate changes are needed.

Asset-based lending to the rescue!

There can be many reasons why a business finds themselves experiencing cash flow problems and not all of them are negative. Unexpected growth opportunities are one such instance that you may find the need for extra working capital. The orders are coming in but you need cash to purchase inventory and supplies. 

Turning to traditional funding options, like banks, is not always possible. You may have maxed out your current borrowing capacity or, depending on your situation, it could be difficult to secure funding from traditional sources, as the loan criteria for banks can be more rigid.

On the other hand, with options such as asset-based lending, companies that have well-established financial reporting systems can unlock working capital to keep their business thriving.

Need a quick refresher on the CCC and how to calculate it? Keep reading to review the basics of your CCC (or read more about it in part 1 of this series). Ready to learn about ABL? Skip ahead for the top 3 benefits of this powerful alternative lending solution.

Quick Recap: What is the cash cycle?

Cash conversion 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’s cash flow. Your 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.

cash conversion cycle formula

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.

 

 

Want to learn more about smart cash flow strategies? Check out our Ultimate Cash Cycle Guide

ABL Advantage 1: Option-rich financing alternative

Asset-based lending 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 can help you grow your working capital faster than many other funding products. How? It’s based on a percentage of your assets — so with more assets comes more opportunity. ABL could even offer funding as high as $10 million.

ABL Advantage 2: Discrete and flexible

ABL is also cost-effective, very flexible and discrete – 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.

ABL Advantage 3: Turn inventory into profit quicker

How does this impact the cash cycle? By securing ABL funding, a company will effectively reduce their DSO (Days Sales Outstanding) and 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 Scenario: How ABL can work for companies in real life

Using ABL

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.

CCC BEFORE ABL FUNDING CCC AFTER ABL FUNDING
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

What is the end results?

Using Asset-Based Lending, Clarence’s cash flow cycle has 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.

Up Next:

Read Part 1: How to determine your company’s «cash conversion cycle»

Cash conversion cycle

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

Cash flow tactics for CFO

Read Part 4: Learn how to keep suppliers happy and cash in your pocket

About Liquid Capital

At Liquid Capital, we understand what it takes for small, medium, and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital you’re talking directly to your funding source and a fellow business person.

When crisis strikes, small business innovation shines

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During times of economic uncertainty, get inspired with these lessons on small business innovation.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”
—Charles Darwin

When major world events send shockwaves through the economy, businesses often have to rethink their business models and growth strategies. Though it’s easier for companies with deep pockets to take big chances on new ideas, recently, small businesses are proving their skills of thinking further outside of the box to find innovative revenue streams that pay off.

For one Montreal entrepreneur, Bijan Bolouri, such a situation occurred when the COVID pandemic hit while he was vacationing in Florida with his family.

It was early March, just a couple of weeks before the province of Quebec ordered all non-essential business to close, but the co-founder and CEO of b.cycle, which operates three fitness studios in Montreal’s downtown, Old Port and Westmount neighbourhoods, says he wasn’t waiting for an official mandate to put a plan into action.

“The news was starting to explode and I knew we had to be proactive. It was clear to me that we would be closing all three studios. The only questions were when and for how long?”

Like many business owners quickly facing unprecedented situations, he was forced to adapt to the new normal— and learned some valuable lessons about resilience along the way.

Lesson 1: Slow down and resist the urge to react hastily

The company immediately went into problem-solving mode, with a critical focus on how to retain its eight full-time employees and a part-time workforce of 22 others. Before the pandemic hit, Bolouri says the five-year-old company was having its best year to date. This gave him a financial cushion and some extra time to formulate a survival strategy.

“As stress mounts, it’s important to take a step back to look at the big picture. It’s easy to make a quick decision to try and solve a problem when emotions are running high, but those quick fixes are usually very short-term. When we closed the studios, we were planning to be closed for at least three months, even though at that point the government was saying two weeks.”

Lesson 2: Be prepared for a dramatic drop in revenue

While seasonal highs and lows are common in many industries, a massive unexpected dip in sales can be crippling. Having a contingency plan in place, and the right contacts at your fingertips can get you through, as was the case for b.cycle.

When the busy studios that usually have more than 4,000 customers a month shut down, b.cycle’s revenue plummeted by 90 to 95 percent. Bolouri immediately took himself off the payroll to ensure he could retain full-time staff While this wasn’t an ideal solution, it was a temporary band-aid that ensured he could keep paying his employees.

The company also tapped into some of the government assistance programs and reached out to key partners to negotiate its financial commitments. He also worked with his business colleagues and partners to free up cash flow.

“We had very open discussions with our banks and suppliers who lightened the load for us. It was phenomenal,” Bolouri explained.

Lesson 3: Focus on where you can help

Shortly after the studios closed, Bolouri pulled his team together for a brainstorming session on how to generate revenue while continuing to support the community amid so much uncertainty and anxiety. 

“From day one, our philosophy has always been to provide the highest level of customer service. We are constantly asking ourselves how we can take care of the community and do right by them.” 

Even the smallest actions, such as communicating regularly with your customers, can go a long way in maintaining a high level of customer service.

pivot for the win

Lesson 4: Pivot for the win

That mission gave birth to b.cycle’s launch of free online classes on Instagram to its more than 11,000 followers.

“The team was really emotional when we had to close,” Bolouri recounted. “Everyone wanted to do something to help, so we started offering the online classes almost immediately.”

The response from the b.cycle community was swift and dramatic.

“Right away they started asking how they could help us (to ensure the company stayed afloat). We created a donation page on our website, and the community gave back to us big time. Hundreds of people made financial donations, and that supported the entire team of instructors.”

Lesson 5: Spin gold from straw

At the same time, demand was ramping up for spin bike rentals. Bolouri answered the call by renting out the studio’s fleet of bikes on three-month contracts at $50 a week, deploying some of its part-time workforce to clean, deliver and set them up in customers’ homes.

That pivot led to an entirely new line of business (and revenue stream) for the company.

In May, it launched b.Home, a digital platform that offers more than 40 live classes a week as well as on-demand spin and body classes, allowing users to keep up with their fitness regimes from the comfort of their homes.

“We spent three weeks strategizing the business plan,” Bolouri continued. “It was a big investment. We bought a bunch of bikes and created a brand-new online platform from scratch. We also launched an online shop to sell merchandise.”

It can be a daunting task to pivot your business plan when the unexpected hits — especially for small businesses that have limited cash flow. Taking the lessons learned by other business owners and applying them in your own organization can help put you on the fast track. And when crisis strikes, be sure to rely on your own small business innovation.

About Liquid Capital

At Liquid Capital, we understand what it takes for small, medium, and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital you’re talking directly to your funding source and a fellow business person.

Financiamientos Recientes – Julio 2020 - Liquid Capital

Financiamientos Recientes – Agosto 2020

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Financiamientos Recientes – Julio 2020 - Liquid Capital

Small business giving back.

The power of good: 3 great stories about small businesses giving back

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No matter the size of the company, all it takes is people with a passion to help others. Here’s how some small businesses are giving back.

Small business giving back.

It’s not uncommon to see big brands with deep pockets taking action on major social issues like climate change and education. Many have adopted formal corporate social responsibility initiatives and want to be seen as good corporate citizens doing their part to combat social problems.

While smaller businesses don’t have the same financial clout, many donate their time, money and resources to support worthy social causes. In a 2019 study, 72% of people surveyed said they believe locally-owned businesses were more likely than large companies to be involved in improving their communities, reports Harvard Business Review.

With that in mind, here are three companies that are making meaningful changes in their communities and beyond.

1. First Step Staffing

First Choice Staffing

Breaking the cycle of poverty for people in socially disadvantaged populations is a mammoth challenge. It’s also the mission of First Step Staffing, a U.S.-based staffing organization that employs men and women experiencing and at risk of homelessness or facing other barriers to employment.

Founded in Atlanta in 2007 by Greg Block, the non-profit has nine offices in Georgia, Pennsylvania, Texas and California. Over the years, the organization has helped thousands of vulnerable people find positions with First Step’s corporate customers that don’t necessarily have the capacity to interview and hire workers themselves.

The businesses that partner with First Step benefit from the organization’s holistic approach to staffing services. Not only does the organization provide job coaching to ensure workers are prepared when they show up, they also offer transportation to and from job locations, which are often outside of the city and not easily accessible by public transit. In many cases, businesses end up hiring the temporary workers on a full-time basis.

Escaping a troubled past

One of the organization’s success stories is Camden, New Jersey resident James Redd. When Redd returned home after a five-year stint in jail, he was looking for a fresh start and a job to help support his three children. 

The return to civilian life is daunting for those who have been imprisoned. In the U.S., state and local governments have no obligation to help a prisoner re-enter society.

Through First Step Staffing, Redd was able to land temporary work at a local food services company where he was praised for his hard work and dedication. After logging 400 hours as a temporary employee, Redd was hired full-time, an opportunity he describes as “life-changing.”

2. Peace by Chocolate

Peace by chocolate

In 2015, Tareq Hadhad and his family arrived in Antigonish, Nova Scotia, after fleeing war-torn Syria in 2012 — and leaving everything behind.

The Hadhads were determined to rebuild their lives and make a positive contribution to the community that sponsored them. In Damascus, Tareq’s father Assam was a successful chocolate maker, employing 30 people and shipping his confections all over the Middle East. Now living in a new country, they decided to continue the family tradition in Canada.

From refugee to entrepreneur

Eight months after arriving in Nova Scotia, with the help of volunteers, the family built a social enterprise –– Peace By Chocolate –– which sells sweet treats around the world. 

The company quickly grew, aided by some high-profile shout outs like the one from Canadian Prime Minister Justin Trudeau in an address to the United Nations. 

Paying it forward

Beyond supporting social causes around the world through its charitable foundation, Peace on Earth Society, Hadhad plans to hire 50 refugees by 2022 and to mentor 10 refugee-run start-ups over the next few years.

Today the company employs about 60 people and they are gaining great attention for their work. In fact, the family’s success story will be chronicled in a feature film, which is currently in production.

3. Harold’s BBQ

Harolds BBQ

Before he launched Harold’s BBQ Restaurant, Linden Massey drove an 18-wheeler for 38 years. He knows how challenging it can be for long-haul truck drivers to find a hot meal on the road. So when the COVID-19 pandemic hit and closed many restaurants, Massey made it his mission to feed the essential workers who are so crucial to the supply chain.

Chipping in for the cause

Over the course of the past few months, Massey and his staff at the Corning, Arkansas diner have served up more than 2,500 sack lunches to truckers from the U.S., Canada and Mexico passing by his restaurant.

But he hasn’t done it alone. When Massey started to run out of supplies for the hot sandwiches, he took to Facebook asking for help. 

«They can only eat out of their refrigerator and cooler for so long,» Massey said in an interview with the local TV station. «I said, ‘I’ve got to get them a hot sandwich. But, I just didn’t have supplies.’ «

The business owner was flooded with food and financial donations, both from the local Arkansas community as well as corporate donors like McDonald’s, Little Debbie and Frito Lay.

Thank-you cards and letters now line a wall inside Harold’s BBQ, and Massey was also the June recipient of Corning’s Gr8 Random Acts of Kindness award.

Good corporate citizens

As you can see, it’s not uncommon for businesses of any size and in any industry to give back to their community. Even if you might be tight on cash flow or don’t currently have enough resources to begin your own initiative, investing time in social responsibility can be a great way to give back and contribute. Doing so will not only give your brand a boost but will also spread morale throughout your company.

About Liquid Capital

At Liquid Capital, we understand what it takes for small, medium, and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital you’re talking directly to your funding source and a fellow business person.

Cash flow tactics for CFO

7 proven cash flow tactics every CFO needs to know

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Part 2 in the Cash Cycle series: Use these cash flow tactics to unlock the working capital you need to achieve your business goals.

If you’re running a business, your “cash conversion cycle” (or “cash cycle”) is a vital component of your financial analysis. It tells you how many days it takes for your company to turn your inventory purchases into cash. The shorter your CCC, the more flexible your working capital — and that is every business owner and CFO’s dream.

With more liquidity and a shorter CCC, you’ll be able to pay bills, make payroll, take advantage of supplier discounts, order new inventory and grow faster.

 

Want to learn more about smart cash flow strategies? Check out our Ultimate Cash Cycle Guide

 

But to shorten the cash cycle, you need to first find a way of adjusting these three key variables:

  1. DIO: Days Inventory Outstanding.
    • The average # days you turn inventory into sales.
  2. DPO: Days Payable Outstanding
    • The # of days it takes to pay your accounts payable.
  3. DSO: Days Sales Outstanding
    • The # of days it will take to collect on sales after they’ve been made.

Want more details on CCC including DIO, DPO and DSO? Read part 1 now.

Once you’ve established your cash cycle, the next step is to implement positive changes to these three variables — ultimately, to shorten your CCC. Luckily, these cash flow tactics can help you achieve this:

1. Sell quicker with improved sales times

Improve cash flow

Selling faster is every company’s goal, but it’s often easier said than done. Taking the time to evaluate your sales process can be a good first step. Identify areas of your sales cycle that can be improved and then implement changes immediately. The goal here is to shorten your DIO and turn your inventory into cash quicker.

2. Build strong relationships with suppliers

You can also shorten your DIO by improving upon your current supply chain. You’ve likely worked hard to develop good relationships with suppliers, so now try to get more favorable terms and agreements to keep your inventory flowing. Idle time and idle inventory are a big expense.

Where possible, take advantage of just-in-time inventory practices, where your goods arrive only as needed. In the past, this was popular for industries such as manufacturing and perishables.

More recently, this has become common in retail and e-commerce, including a wide variety of industries, with a rise in dropshipping. In this inventory model, companies never handle their own inventory – instead, when your customer orders arrive you’ll purchase the inventory from a third party who ships directly to the end customer on your behalf.

3. Better credit and collection process

There’s no doubt that an effective collections department will improve your ability to collect customer invoices on time. Effective collections can help create a more stable and reliable DSO. However, this requires staff training, likely more personnel hours (translating into payroll costs) and leadership’s time to make sure this process is effectively managed.

4. Investigate extended payment term options

cash flow tactics - extended payment terms

Extending your accounts payable will increase your DPO, and help offset the other two factors of your CCC. But this could negatively impact your relationships with suppliers if you extend too much, and breaching the terms could put you at risk of becoming the delinquent account you’re trying to avoid in your own A/R. 

If you have nurtured a strong relationship with your suppliers, then you may be able to ask for extensions on your payment terms without negatively affecting your standing with suppliers.

5. Reduce your 30/60/90 day payment terms

Fortunately, you’re in control of your accounts receivable terms and can shorten them to receive payment earlier. By reducing your terms, you lower your DSO and speed up your cash cycle.

Unfortunately, many customers request and expect longer terms. Some industries abide by certain time frames to pay, which may not match up with your cash flow needs. And other customers will be delinquent on payment no matter what terms you agree upon. You may risk losing sales to competitors offering better terms.

6. Early pay discounts

These are generally not very effective at reducing your DSO and some customers take the discount even when they pay on normal schedules. Overall, this can lead to lower revenue than expected, which doesn’t amount to a cheap option.

 

Strategic Financing

7. Smart & strategic financing

Being strategic with your billing and collections is one of the most accessible cash flow tactics that you can use to improve your cash cycle, and you can use commercial finance solutions to dramatically shorten your DSO. In fact, instead of having a DSO of 30/60/90 or more days, you can have a DSO of one day.

 

Up Next:

Read Part 1: How to determine your company’s “cash conversion cycle”

Cash conversion cycle

Read Part 3: Learn how to leverage your assets to grow your working capital

Grow your working capital

Read Part 4: Learn how to keep suppliers happy and cash in your pocket

About Liquid Capital

At Liquid Capital, we understand what it takes for small, medium, and emerging mid-market businesses to succeed – because we’re business people ourselves. Our company is built on a network of locally owned and operated Principal Offices, so whenever you’re talking to Liquid Capital you’re talking directly to your funding source and a fellow business person.