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

Strategy 3: Working Capital Using Purchase Order Financing

The following analysis represents the IRR by utilizing another form of Alternative Financing, namely, Purchase Order (PO) Funding where the business supplies some of the required working capital ("Soft Costs") and the Purchase Order Funding supplies the balance of the working capital requirements ("Hard Costs"). In this example, it is assumed that 15% of the COGS will be "Soft Costs" (direct labor and associated overhead) and the remainder 85% will be related with the "Hard Costs" (materials, supplies, equipment, shipping, receiving, etc.).

The Purchase Order Funding Company will pay each Vendor/Supplier 100% of the "Hard Costs" up front. After which, they will collect the payment from the customer and rebate all the Gross Profit, less the Purchase Order Funding Fee, back to the business within 7 days after the customer pays for the goods sold. Please note the Purchase Order Funding Company pays the Vendor/Supplier with the order for supplies and equipment (if the Vendor/Supplier was offering credit, e.g. net 30 days, the order was placed 45 days before delivery of the goods sold). Sometimes, for example, the "Hard Costs" for a 45 day accounts receivable may require 90 days of funding instead of the 60 days of funding as defined for this strategy.

The Purchase Order Funding cost is set in this example at 5.5%, 8.25%, 11% and 13.75% of 100% of "Hard Costs" (or 2.81%, 4.21%, 5.61% and 7.01% of invoice amount) for a 15, 30, 45, and 60 day accounts receivable. (Note: If the business is being offered credit (e.g. net 30 days) by their Vendor/Suppliers, this analysis does not take into account that the Purchase Order Funding Company is supplying cash with the order for supplies and equipment. In reality, the business would normally ask for and receive additional discounts from the suppliers. Therefore, the IRR would become even more attractive the business using Purchase Order Funding.) It is still assumed the "Soft Costs" will have to be paid 15 days prior to invoicing.

Working Capital Reduction Mechanism

Whenever Purchase Order Funding is utilized for a business transaction, the working capital requirement is reduced even more dramatically. In this illustration, all the required "Hard Costs" are provided by the Purchase Order Funding Company. This means the business has to supply only the working capital for the "Soft Costs" associated with the transaction. On the downside the total length of the transaction is about 7 days longer on the average because it takes some time for the Purchase Order Funding Company to rebate the balance of the funds to the business. This implies the working capital requirement is reduced across all accounts receivable by 85%.

The following chart and table summarizes working capital savings mechanism for the strategy. This strategy indicates that all the "Hard Costs" have been relieved. Therefore, the business now has a choice of where 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 3

Strategy 3
Working Capital Reduction Mechanism
PO Funding

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 PO Funding					15 Day A/R	30 Day A/R	45 Day A/R	60 Day A/R
Production Costs (Paid 15 Days before Invoicing) (COGS)					-9%	-9%	-9%	-9%
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 Customer Pays (Days)					15 Days	30 Days	45 Days	60 Days
Wait Time for the PO Funding Rebate Balance (Days)					7 Days	7 Days	7 Days	7 Days
Rebate from PO Funding (PO Funding Fee Removed)					46.19%	44.79%	43.39%	41.99%
Gross Profit					37.19%	35.79%	34.39%	32.99%

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 PO Funding					15 Day A/R	30 Day A/R	45 Day A/R	60 Day A/R
PO Funding Working Capital Savings2					85..00%	85..00%	85..00%	85..00%
PO Funding Working Capital Reduction					51.00%	51.00%	51.00%	51.00%
New Working Capital Requirement					-9.00%	-9.00%	-9.00%	-9.00%
New Return on Capital Ratio (Return / Investment)					5.13	4.98	4.82	4.67
Net IRR Value of Funding Services					1,649.63%	1,143.98%	867.07%	692.06%

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² The Working Capital Reduction Mechanism is a function of the amount of "Hard Costs" associated with the transaction, e.g. 85% of the Cost of Goods Sold are "Hard Costs" (or 51% of the face value of the transaction). The working capital reduction is assumed to be available for 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. The total extra capital accessibility is a figure of merit of the financial worthiness of this strategy and is intended only to exhibit the amount of extra capital anticipated in addition to the gross profit of Strategy 1.

Working Capital Funded by PO Funding					15 Day A/R	30 Day A/R	45 Day A/R	60 Day A/R
2X Number of Business Transactions Deployed					2	2	2	2
2X Net Gross Profit (PO Funding Fee Removed)					74.38%	71.58%	68.78%	65.98%
2X Extra Working Capital Available					42.00%	42.00%	42.00%	42.00%
Total 2X Extra Capital Accessibility (less 40% 1X Profit)					76.38%	73.58%	70.78%	67.98%

Working Capital Profitability Mechanism

The profitability mechanism employed for Purchase Order Funding allows the working capital requirement to be reduced more substantially than Accounts Receivable Financing outlined in Strategy 2. Once again, 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 2, 3, or 4 business transactions using Strategy 3 for any accounts receivable.

Therefore, when a business grows Purchase Order Funding provides a built-in growth mechanism that uses the same working capital investment for several additional transactions. Once again, 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 business over current levels?".

Note that when a business decides to double the business, 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 obligations 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 3

Strategy 3
Working Capital Profitability Mechanism
PO Funding 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 Purchase Order Funding.

Strategy 3
Using PO Funding

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. 

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