How much is your ROI in Cash and Short-term funding?

Before long-term funding, make sure Everything is done in Cash & short-term funding

This blog series is dedicated to Cash — from startup’s to corporate treasuries.

Not surprisingly, an investment in acquiring a long-term funding is many times higher than an investment in short-term funding. Too often we focus in long-term funding — organic cashflow is always the most important and most cost efficient funding source. Before long-term funding, make sure Everything is done in Cash & short-term funding, because working capital planning can have a significant effect on your external funding need.

Cash forecast is the core of your funding negotiations. Forecasting of your cash need increases it’s importance because of the pricing and erosion of external funding sources.

Accounts receivable is Your funding to the Customer. Not a balance sheet item.

Rule number one is to focus on customer invoicing. Getting paid a year advance eliminates the cashflow through. This is not always possible but build your engine on advance payments or short payment terms. Make sure you are invoicing promptly. On the cost side, keep your burn-rate in control. Don’t spend in front of revenue, spend only behind revenue. The longer payment terms you can negotiate with your supplier, the better.

Factoring, supply chain finance and alternative finance. Get Cash out of Account receivables

Factoring, supply chain finance and alternative financing sources are alternatives to get Cash our of your open receivables. In Factoring, your ROI depends on primarily your credit rating, customer payment terms and number of invoices — in supply chain finance, ROI depends mainly on your customers credit rating, as it’s based on your customer credit rating. Considering the total costs, it’s good to go through bank’s software — there are big differences in interfaces and solutions — and estimate your alternative costs arising in invoice processing.

Cash limit helps in Cash fluctuations

Cash limit is a must have to include in request of proposals. It’s a buffer, which helps in cash fluctuations. Your ROI includes a sign-up fee and a credit provision added by a margin for those days of negative cash balance.

Cash Pool solutions are must-to-have in Group of companies

I’ve been setting up several types of cash pool structures during my life, and I highly recommend this also to mid-size companies to consider. Cash Pool is a strategic choice and once build up, it’s not easy to break down. Usually the pricing of the whole cash management structure (request of proposal) will be bid between 3–4 banks and is including all incoming and outgoing payments like SEPA payments, cross-border payments, salaries, reference payments, credit limits and so on. Sometimes it’s included as a part of the long-term facilities.

Cash pools are natural part of corporate treasuries, but it’s also recommended solution for a group of companies which have cash fluctuations between companies. Like payments in mother company and incomes in the others. In cash pool, you set up a new external cash pool account which balance your cash deficit to cash positive — it means that each of your business has all cash to use. You can have it from single to multi-currency structures and include a cash limit in top of all. It’s still possible to make payments in all bank accounts. I’ve been setting up several types of cash pool structures during my life, and I highly recommend this also to mid-size companies to consider.

If you’re starting from the scratch, be prepared that your bank can ask annual volumes of SEPA and cross-border payments, salaries, taxes and reference payments. This is because you need to centralize most your payments to the cash pool bank.

Supply chain financing and Dynamic discounting model are just examples of many areas, where Corporates can create value-add to the whole ecosystem

Dynamic discounting model is something what companies can create to obtain optimal cash discounts from their suppliers. From the supplier point of view, this is valuable opportunity to improve cashflow. Multinational, cash positive companies are facing challenges in current negative yield environment. Cashflow is flying in, but now banks are charging, not crediting, for the funds sitting as deposits. At the same time, these large companies are in the heart of its supplier ecosystem. Solution is a supplier discounting model, which is digital cash discount auction for suppliers having direct impact on profitability and ROCE, return of capital employed.

Supply chain financing model means that the large companies with advanced credit rating are selling their receivables to the bank, which in turn can offer short-term funding with advanced term to the supplier network. Usually, this is proposed along with payment terms negotiations and for supplier, it allows to receive cash during the couple of days from the invoice. Priced as reference rate added by margin, its competitive in current low yield environment.

Factoring financing model is similar than supplier chain financing, but in this case, supplier is selling their receivables to the bank. This means that credit decision is based on supplier’s credit rating.

Long-term funding sources are the last on the list

The larger the company grow, the better are cash and working capital funding facilities. Before long-term funding, make sure Everything is done in Cash & short-term funding. Don’t raise until the business works, with all expenses accounted for.

The author is the Founder of BackedByCFO, CFO As A Service from seed to IPO and passionate to help CEO’s with cashflow, fintech and metrics.