Join the Profitability Revolution

Working Capital Reduction, Transaction Definition, Transaction Profitability Summary, Working Capital Profit Mechanism

Strategy 2: Working Capital Using Accounts Receivable Financing

The following represents the IRR quantitative analysis by adding Alternative Financing, to the business transaction used in Strategy 1, namely, using Accounts Receivable Financing. Again, like Strategy 1, the business supplies all of the required working capital for the business transaction. In this example, the Accounts Receivable Financing Company advances 70% of the Invoice to the business within 48 Hours and the Accounts Receivable Financing Company Fee is 3%, 5%, 7%, and 9% for a 15, 30, 45, and 60 day accounts receivable. This action essentially turns the 15, 30, 45, and 60 day accounts receivable into a cash transaction, since the 70% advance is more than enough to replace the 60% working capital investment.

Working Capital Reduction Mechanism

Whenever Accounts Receivable Financing is utilized for a business transaction, the working capital requirement is reduced significantly. In this illustration, all the required working capital is recuperated when the Accounts Receivable Finance Company provides the Advance within 2 days of the delivery of the goods and services to the Customer. This means the business’s working capital is required only for 17 days for a given transaction regardless how long the accounts receivable is outstanding. On the downside, the total length of the transaction is about 7 days longer on average because it takes some time for the Accounts Receivable Financing Company to rebate the balance of the funds to the business. This implies the working capital requirement is reduced by 20.00%, 46.67%, 60.00%, and 68.00% for 15, 30, 45, and 60 day accounts receivable.

The following chart and table summarizes working capital savings mechanism for the strategy. This strategy indicates that for 6, 21, 36, and 51 days there is no requirement for working capital for the 15, 30, 45, or 60 day accounts receivable. Therefore, the business has a choice of where else to use the funds, because the funds are not required for this transaction. Using the funds for one or more transactions will yield higher profitability for the business, however, the business can itself determine what is best for the business. Business executives thrive on having extra funds available.

Strategy 2

Strategy 2
Working Capital Reduction Mechanism
A/R Financing

Business Transaction Definition

The table below summarizes the investment in working capital and sales revenue streams, along with the timing, for this strategy.

Working Capital Funded by A/R Financing					15 Day A/R	30 Day A/R	45 Day A/R	60 Day A/R
Production Costs (Paid 15 Days before Invoicing) (COGS)					-60%	-60%	-60%	-60%
Wait Time before Invoicing Customer (Days)					15 Days	15 Days	15 Days	15 Days
Business Delivers Goods and Invoices Customer (Days)					0 Days	0 Days	0 Days	0 Days
Wait Time before Advance from A/R Financing is Received (Days)					2 Days	2 Days	2 Days	2 Days
Advance from A/R Financing (Percentage of Invoice Value)					70%	70%	70%	70%
Wait Time before Customer Pays (Days)					13 Days	28 Days	43 Days	58 Days
Wait Time for the A/R Financing to Rebate Balance Due (Days)					7 Days	7 Days	7 Days	7 Days
Rebate frpm A/R Financing (A/R Financing Fee Removed)					27%	25%	23%	21%
Gross Profit					37%	35%	33%	31%

Business Transaction Profitability Summary

The working capital reduction value indicates the actual reduction amount (percentage of face value of the transaction) when comparing this strategy to Strategy 1. The new working capital requirement value represents the new base capital obligation for this strategy. The new return on capital ratio and the internal rate of return values represents the profitability of this business transaction. The ratio and the IRR percentage can be used to compare this strategy with other strategies.

Working Capital Funded by A/R Financing					15 Day A/R	30 Day A/R	45 Day A/R	60 Day A/R
A/R Working Capital Time Savings1					20..00%	46.67%	60.00%	68.00%
A/R Working Capital Reduction					12.00%	28.00%	36.00%	40.80%
New Working Capital Requirement					-48.00%	-32.00%	-24.00%	-19.20%
New Return on Capital Ratio (Return / Investment)					2.02	2.97	3.88	4.74
Net IRR Value of Funding Services					815.50%	699.75%	620.30%	561.62%

----------------------------------------
¹ The Working Capital Reduction Mechanism is a function of the number of days saved for the transaction, e.g. for a 45 day A/R the working capital is required for the 15 days prior to delivery plus the 2 days to receive the Advance and the 7 days to receive the Rebate. Therefore, the actual working capital reduction for the 45 day A/R would be 60% * (60-15-2-7)/60 which would equal 36%. The working capital reduction is assumed to be available to support other transactions.

Two Transaction Business Profitability Summary

This table summarizes the profitability of this strategy when two (2) business transactions (2X) are consummated instead of the one (1) business transaction (1X) of Strategy 1. This strategy reduces the working capital requirement in such a way that more than one transaction can be funded by the same amount of working capital that was required for Strategy 1. (Note that certain accounts receivable can not support two transactions for this strategy. However, extra working capital is available for the business to use elsewhere). The total extra capital accessibility is a figure of merit of the financial worthiness of this strategy and is intended to exhibit the amount of extra capital anticipated in addition to the gross profit of Strategy 1.

Working Capital Funded by A/R Financing					15 Day A/R	30 Day A/R	45 Day A/R	60 Day A/R
2X Number of Business Transactions Deployed					1	1	2	2
2X Net Gross Profit (A/R Financing Fee Removed)					37%	35%	66%	62%
2X Extra Working Capital Available					12.00%	28.00%	12.00%	21.60%
Total 2X Extra Capital Accessibility (less 40% 1X Profit)					9.00%	23.00%	38.00%	43.60%

Working Capital Profitability Mechanism

The profitability mechanism that is employed by using Accounts Receivable Financing for business transactions increases both the profitability of the business and business profits. This type of financing allows the working capital requirement to be reduced significantly. Profits can be increased in quantum leaps by using the same working capital investment for several transactions. For example, the chart below indicates the same working capital investment for a single transaction employing Strategy 1 can be used for either two (2) or three (3) additional transactions using Strategy 2. It can be perceived from the chart that the relieved working capital from a single transaction can support two (2) transactions for 30, 45, or 60 day accounts receivable. Three (3) transactions can be sustained for either 45 or 60 day accounts receivable, and four (4) transactions can be maintained for a 60 day accounts receivable.

Therefore, if the business is growing, even growing wildly, Accounts Receivable Financing provides a built-in growth mechanism that uses the same working capital investment for several additional transactions. The only question that business people have to ask themselves is "What does this business have to do in order to create a twofold or threefold increase in sales revenue over current levels?". It is interesting to note that if a business decides to double the sales revenue, and most businesses can do that with only a minimal increase in overhead, not all of the relieved working capital is necessary for funding twice the number of transactions. This means the additional cash becomes available to address other pressures that executives face every day. Businesses often need capital for modernization of plant and equipment, marketing, sales, advertising, profits, and human resources. Human resources often strain business cash requirements because the business itself has little control of the rising cost of health care and external governmental regulations. Businesses can always use funds for retraining, health care, profit sharing, dividends and other miscellaneous problems that arise from time to time.

Strategy 2

Strategy 2
Working Capital Profitability Mechanism
A/R Financing Transaction Enhancement

Strategy Summarization

The chart and table below provides a statistical and graphic representation that assists in interpretation of the relative value of a business employing this strategy, Working Capital Funded by using Accounts Receivable Financing.

Strategy 2
Using A/R Financing

3W Internet Corporation commits its resources to support every alternative financial specialty that is described in this primer. Although all the computations featured in this document have been thoroughly checked and tested, there may be some functions that rely upon other financial concepts methods, strategies and ideas using software, and protocols not developed by 3W Internet Corporation. 

Copyright © 1997-, 3W Internet Corporation. All rights reserved.
P.O. Box 209, Morrisville, PA 19067-0209
Contact 3W Internet Corporation by phone:(215) 736-1107, Fax: (215) 736-0268
email: info@3wi.com