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A Great Working Capital and Cash flow Strategy

Guest post by: Stan Prokop

Article Overview: The article provides insight into why business owners should focus on the most valuable free working capital asset they possess - supplier financing of their cash flow .

A Great Working Capital and Cash flow Strategy

When business owners think of financing their business they typically think of two things - borrowing money and putting more equity in the businesses. These are the traditional sources of business capital.

Most business owners and financial managers don't realize it but one of the most powerful, and cheapest! ways of enhancing working capital and cash flow is to let your suppliers do this for you at their cost .

The concept is of course Supplier financing of you assets. How can a business calculate what portion of their business is currently being financed by suppliers, and can this be increased and maximized??

The formula for analyzing our strategy is as follows:

Accounts payable divided by total Assets X 100 (We use 100 to create a per cent age answer)

We of course obtain our payables number from the debt side of the balance sheet, and our total assets from the assets portion of our balance sheets.

Suppliers participate, whether they like it or not! In the financing and capitalization of our businesses. When credit is extended to our businesses on an unsecured basis for the goods we purchase this is a key source of our working capital. It's short term credit obviously, not long term credit and we of course need to remember the cardinal rule of this working capital strategy - keep our suppliers happy and current.

Suppliers and customers enjoy a mutually symbiotic relationship - we need each other to be successful. Good suppliers with whom we have strong relationships will extend us as much credit as we need within a reasonable amount of risk they are prepared to take. We are the beneficiaries of unsecured interest free financing.

Are there risks in this strategy? We have already alluded to the fact that there are risks. We need to keep our suppliers, as stated, happy and current. If they are uncertain as to our payment ability they will suspend credit, which is a key source of working capital.

Business owners should monitor the supplier financing of working capital on an ongoing basis. Yes there will be fluctuations, but we should ensure that on balance we are maximizing this form of free from interest working capital, while at the same time focusing on good supplier relations.

Free working capital. It's a balancing act!

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Article Tags: cash flow, working capital



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