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Inventory, Purchase Order, and Receivable Financing – Working Capital Solutions

Guest post by: Stan Prokop

Article Overview: An overview of how inventory financing, purchase order financing and receivable facilities as alternative financing solutions where benefits far exceed costs .

Inventory, Purchase Order, and Receivable Financing – Working Capital Solutions

Inventory, Purchase Orders and Receivables - Canadian business owners and financial managers want to maximize working capital solutions around their key financeable assets. How can they do this when they are unable to generate all the working capital and cash flow they need for their businesses?

Growing sales and profits often forces Canadian business owners to assess their financial needs. Those needs come only the form of three areas of business finance

- New owner equity or outside equity

- Debt (loans )

- Operational efficiencies

We will concentrate our information on the third area, operational efficiencies - and by the way, it's the best and cheapest, which we will prove. Borrowing, incurring more debt, or bring in outside equity are not the financing of choice if Canadian business owners had their way.

By operating more efficiently, even if you have to leverage short term current assets at a cost is the best way to increase bottom line value and also cash flow for your firm.

Let's look at purchase order financing as an example. If you choose a purchase order financing facility you are obviously in a position to take on larger contracts and generate more profits for your firm. Overall larger orders and contracts also increase your competitiveness in your industry.

By utilizing a p.o. financing strategy you simply allow the p.o. finance firm to pay suppliers for goods and service you need to facilitate the order. When your product is shipped and delivered the purchase order finance firm is paid by your yourself via your bank or factoring facility. Although you have a higher cost of financing lets look at what really has happened - you have converted inventory into A/R into cash - Payment by your customer generates profit. Without the financing of the purchase order you more often than not could not have fulfilled such large orders or contracts. So by sacrificing some gross margin you have grown revenues and bottom line profits.

By utilizing an inventory financing strategy similar financial success is achieved. With an inventory financing facility in place you can stock more products and generate those additional sales.

An inventory financing facility via an based line of credit']);"> asset based line of credit is very complimentary to your receivable and purchase order strategy. You are simply maximizing your cash conversion cycle - you are turning orders into inventory into cash into profits in a manner that previously was not possible. Higher financing costs are in many cases easily offset by smarter volume purchasing and your ability to pay cash for products and services.

The cost of not taking discounts or being unable to make volume purchases for cash is significantly great than the financing costs you have for alternative financing facilities such as inventory financing, purchase order financing and receivable financing.

We offer up the comment to many clients that even if purchase order ,inventory and receivable financing were equal in cost to the cost of carrying receivable and inventory on your own books it would still be a viable solution because you would have less sales and less competitiveness in the marketplace .

Example - if f your firm could buy 500,000.00 of inventory on 2% net ten day terms and you were unable to take the discount the opportunity cost of not taking that discount is over 36%.

The simple statement we make to clients is as follows ' the cost of paying in full is usually much higher than the cost of borrowing '!

In summary, consider purchase order, inventory and A/R financing in context of selling more, turning assets over quickly, and maximizing the opportunity cost of working capital. If you are uncomfortable in determining your exact working capital strategy needs consult the services of an experienced and credible financing advisor.

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Article Tags: inventory financing, purchase order financing, working capital



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