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

Strategy 4:
Working Capital using Purchase Order & Accounts Receivable Financing

The following analysis represents the IRR by utilizing a combination of both forms of Alternative Financing, namely, Purchase Order Funding and Accounts Receivable Financing, a combination of Strategy 2 and Strategy 3.

In this example the Purchase Order Funding is terminated by using the funds provided by the Advance (70%) from the Accounts Receivable Financing Company. That implies the Purchase Order Funding is outstanding for 15 days plus 48 hours or until the Accounts Receivable Financing Company supplies the Advance. This reduces the costs for Purchase Order Funding to a flat 8% of 100% of "Hard Costs" (or 4.08% of invoice amount) for a 15, 30, 45, and 60 day accounts receivable.

The Accounts Receivable Financing Company advances 70% of the Invoice to the business within 48 Hours and the Accounts Receivable Financing Fee is 3%, 5%, 7%, and 9% for a 15, 30, 45, and 60 day accounts receivable.

Working Capital Reduction Mechanism

Whenever Purchase Order Funding and Accounts Receivable Financing are both put to use for a business transaction the working capital requirement is diminished considerably. In this illustration, all the required "Hard Costs" are provided by the Purchase Order Funding Company, and the Accounts Receivable Financing Company funds the rest of the transaction. This means the business has to supply only the working capital for the "Soft Costs" associated with the transaction for the first 17 days only. As before, the total length of the transaction is about 7 days longer on the average because it takes some time for the Accounts Receivable Funding Company to rebate the balance of the funds to the business.

Therefore, the "Hard" Working Capital requirement is reduced across all accounts receivable by 85%, and the "Soft" Working Capital requirement is reduced by 20.00%, 46.67%, 60.00%, and 68.00% for the 15, 30, 45, and 60 day accounts receivable. The chart below reflects the sensational impact that Alternative Financing has on the net working capital requirement for the transaction.

The following chart and table summarizes working capital savings mechanism for the strategy. This strategy indicates that all the "Hard Costs" have been relieved and 6, 21, 36, and 51 days have no working capital requirement for the "Soft Costs" associated with the 15, 30, 45, or 60 day accounts receivable. 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 4

Strategy 4
Working Capital Reduction Mechanism
PO Funding and A/R Financing Savings

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 and 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)					-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 Advance from A/R Financing is Received (Days)					2 Days	2 Days	2 Days	2 Days
Advance from A/R Financing (less PO Funding Rebate)					14.92%	14.92%	14.92%	14.92%
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					32.92%	30.92%	28.92%	26.92%

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 and A/R Financing					15 Day A/R	30 Day A/R	45 Day A/R	60 Day A/R
PO Funding Working Capital Savings					85.00%	85.00%	85.00%	85.00%
PO Funding Working Capital Reduction					51.00%	51.00%	51.00%	51.00%
A/R Working Capital Time Savings					20..00%	46.67%	60.00%	68.00%
A/R Working Capital Reduction					1.80%	2.20%	5.40%	6.12%
New Working Capital Requirement					-7.20%	-4.80%	-3.60%	-2.88%
New Return on Capital Ratio (Return / Investment)					5.82	8.32	10.53	12.47
Net IRR Value of Funding Services					2,130.02%	1,736.58%	1,511.87%	1,369.70%

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 and 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					2	2	2	2
2X Net Gross Profit (PO & A/R Financing Fee Removed)					65.84%	61.84%	57.84%	53.84%
2X Extra Working Capital Available					45.60%	50.40%	52.80%	54.24%
Total 2X Extra Capital Accessibility (less 40% 1X Profit)					71.44%	72.24%	70.64%	68.08%

Working Capital Profitability Mechanism

The profitability mechanism employed by using both Accounts Receivable Financing and Purchase Order Funding for business transactions allows the working capital requirement to be reduced more significantly than Accounts Receivable Financing outlined in Strategy 2 and the Purchase Order Funding in Strategy 3. 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, 4 or more (up to 7) business transactions using Strategy 4 for any accounts receivable.

Therefore, when a business grows, the combination of Accounts Receivable Financing and Purchase Order Funding provides a tremendous built-in growth mechanism that can use the same working capital investment for many 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, 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 demands 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 4

Strategy 4
Working Capital Profitability Mechanism
PO Funding and 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 Purchase Order and Accounts Receivable Financing.

Strategy 4
Using PO Funding and 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. 

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