How to unlock your working capital

Every business needs funds to pay for the operational cycle – the time it takes to invest in the inventory required to produce goods or services, sell these and receive cash in return. To ensure they can continue operating efficiently through each cycle, as well as remain on a growth trajectory, companies need a certain amount of cash in the business – known as ‘working capital’.

Working capital is calculated as an organisation’s current assets minus its current liabilities. Typically, current assets include cash, accounts receivable, inventory and other resources that can be turned into cash; while current liabilities tend to be expenses that are due in less than 12 months.

Measuring financial health

A working capital ratio or net working capital formula is a common metric used to gauge the short-term financial wellbeing of a business. This is calculated by dividing current assets by current liabilities. A ratio less than 1 indicates negative working capital, which means that the company will struggle to pay its short-term liabilities, such as its debtor invoices or taxes payable, among other expenses. Any ratio over 1, on the other hand, indicates positive working capital.

In general, a higher ratio (over 2 and climbing over time) could raise a flag that the company is not leveraging its assets efficiently. Perhaps the company is paying its bills on time, but not collecting the cash that’s owing to the business fast enough, due to debtors insisting on lengthy invoice payment terms. If the company does not address this, it could soon risk running into cash flow problems.

How your unpaid invoices can lead to cash flow problems

With your working capital tied up in unpaid invoices, there is a risk that you could run out of cash to pay your expenses halfway through the operational cycle. You may also find yourself in a serious cash flow crisis if something unexpected should happen, such as an accident or natural disaster that has an impact on your premises, stock or supply chain.

Alternatively, you could witness a sudden peak in demand for your products or solutions, and then struggle to meet this due to a lack of cash in the business as you wait out your invoice payment terms. A 30-, 60- or 90-day wait for payment on your accounts receivable could create a gap for your competitors to step in and capitalise on new opportunities before you can.

One way to unlock much-needed cash in a fast and scalable way is to use invoice factoring as a method of working capital finance. Factoring is a finance solution that involves selling your accounts receivable to a factoring company. This company then provides you with the cash injection you need to keep your business running efficiently and successfully.

    If you choose to partner with Merchant Factors, we will also handle your debtor administration. This means that you can delegate the following tasks to our team:

  • Sending monthly statements
  • Phoning debtors for payments due
  • Sending reminders and final demands
  • Handling receipting and reconciliations
  • Liaising with attorneys if it becomes necessary to institute legal action

This is one of the chief advantages of choosing to factor with Merchant Factors. You do not only get the cash that’s owing to your company when your business really needs it, but you also free up your time to focus on projects that add value. You’ll be amazed at how much time you save (and stress you avoid) when you don’t need to deal with the headache-inducing task of chasing invoice payments.

Improve your working capital now

Merchant Factors was founded in 1988 to offer businesses of all sizes an alternative to traditional bank loans and overdraft facilities. We specialise in local and cross-border finance; and we’re able to tailor our facilities to suit the unique needs of our clients and their operational cycles.

Since our inception, we’ve successfully supported over 2,000 organisations, enabling them to keep their businesses running smoothly and successfully.

We are also proud, as the only truly independent debtor finance institution in South Africa, to be able to offer you the fastest turnaround time in the industry from application to pay-out.

Unlock your working capital today. For fast, flexible invoice financing – contact Merchant Factors.

Finance beyond the Numbers.