Every organization wants to have a reliable flow of cash to help finance its bills and grow. But many businesses struggle with securing payment from buyers, leading to a gap in cash flow that harms their working capital. Using early payment solutions, some companies have successfully created a positive working capital that leads to better funding, more investor opportunities, and an organization primed and ready for growth. To help you revolutionize how your organization tackles early payments, we’ve broken down the components behind using early payments to increase working capital.
Just as they imply, early payments are finances that you secure from your accounts receivables earlier than the listed maturity date. Often, organizations rely on an early payment discount program to offer their customers an incentive to complete payment for goods and services more quickly. When early payment programs are set in place, the customer enjoys paying a discounted rate from the full amount due to paying ahead of schedule. The supplier enjoys quicker access to their cash, helping to enhance their organization’s liquidity.
In other words, a buyer will pay less than the full amount due while the supplier receives payment earlier than they would through a standard payment cycle.
When you incentivize early payments, you help reduce the likelihood of nonpayment or late payments from your buyers. Additionally, it accelerates your business’s cash flow. This means you have greater access to cash to curb expenses and manage debts.
Additionally, having greater access to cash creates a liquid business function. This directly impacts your enterprises’ working capital. As your working capital rises, you’ll find your business process to become stronger, more streamlined, and more secure.
Working capital, also commonly referred to as net working capital, is a metric used to measure the financial health of a business in the short term. The calculated working capital indicates an organization’s ability to pay off its outstanding bills and debts or, in other words, showcases a company’s liquidity.
It isn’t difficult to find your working capital, seeing as all the data you need is included in your balance sheet. To calculate the working capital, you simply need to subtract your current assets from your liabilities. This value can result in positive or negative working capital.
Positive working capital — A positive working capital means your business currently has more cash value than your short-term debts. If your working capital is positive, it means you have enough cash value (or liquidity) to pay off all the existing bills and expenses you have, with some cash leftover. Investors and lenders are usually more willing to fund organizations with positive working capital when it comes to fundraising.
Negative working capital — As you’d expect, negative working capital is the opposite of positive working capital. If your business has a negative working capital, it means you do not have enough cash value or liquidity to cover all your liabilities and existing bills. Enterprises should strive to avoid having negative working capital, as it can be a red flag that deters investors and lenders. Businesses should attempt to increase their cash flow and move back towards positive working capital.
Determining your working capital doesn’t require an advanced math degree or difficult formula. The process is rather simple. To figure out your working capital you can use the following calculation:
To get the information you need, you simply need to look at your balance sheet. Don’t have a balance sheet handy? Not a problem! You can manually calculate your working capital by adding up all your current assets and liabilities. Below, we’ve identified some of the most commonly listed assets and liabilities companies have:
Current assets involve the cash you hold as well as any cash you have guaranteed coming in, typically including:
Current liabilities are the short-term debts that you have to pay off within the year. Some examples include:
When calculating the immediate profitability of your company, there are four distinct factors that you should consider:
In many cases, organizations offer early payment solutions to suppliers in return for a discounted rate. This is a solid strategy to support raising your working capital, as it incentivizes suppliers to pay off their receivables at a faster rate. This helps increase your cash flow, lessening the pressures suppliers can face when dealing with longer payment terms and late payments.
To learn more, reach out to our team of experts. We’re standing by, ready to help you make shift happen in your organization.