A Surefire Way to Increase Operating Cash Flow

Posted by KImberly Armstrong on Nov 21, 2013 6:00:00 AM

An ongoing concern for businesses of every size is the need to maintain or increase operating cash flow. A company can be flush with inventory and other assets, but not have the capital necessary to make strategic moves to improve the business. 

Cash flow is the life-blood of any organization, critical for keeping day-to-day operations moving and managing company growth. New opportunities constantly arise, but a company cannot take advantage of those opportunities without the cash on hand to fund them.

Strong cash flow also offers a bit of a safety net in tough times. For example, you can weather the storm when payables creep up—which they do on occasion in even the healthiest businesses. Cash flow helps you avoid creditors banging on the door while you wait for clients to pay their bills.

How can organizations increase operating cash flow?

One solution is through a Corporate Trade transaction. Using this method, slow-moving, returned, or obsolete goods are sold for Trade Credits. Those Trade Credits are then combined with cash to help fund vital business goods and services, such as advertising, travel or logistics. The cash outlay for these goods and services is reduced, therefore increasing cash flow.

Corporate Trade frees cash by subsidizing business expenses

For example, let’s consider a company unable to sell product nearing its best before date. Instead of writing the product off (and receiving next to nothing for it), the company enters a Corporate Trade transaction and sells the product for Trade Credits.

These Trade Credits are then combined with cash to pay for a $1 million advertising campaign. Rather than paying the full $1 million in cash, the company uses $150,000 in Trade Credits and $850,000 in cash to purchase the media space.

In this example, an extra $150,000 of operating cash flow is now available which can then be used to fund other opportunities to help the business grow.

Corporate Trade frees cash invested in unwanted assets

In addition, when a Corporate Trade deal takes excess inventory off a company’s hands, it also frees cash required to keep those assets on the books, such as the money required for warehousing.

If next season's products are ready to arrive, having available room in the warehouse to store them means there is no need to rent additional space. A company also has the option of reducing the amount of warehouse space for which they are paying once its excess inventory is sold.

Why Corporate Trade is an easy decision

In order to remain a market leader, most manufacturing companies need to continually develop and launch successful products. But it takes a lot of hard work—and cash—to bring those new products to market.

Investment in research, development and design is required. Once a product is ready for production, sales and marketing go to work to spread the word and find retailers willing to dedicate shelf-space to the new product (usually in exchange for a hefty listing fee). All of these activities require cash.

In return for the investment in a new product launch, most manufacturers hope to make 10 to 15 percent on the sale of those products.

It takes a lot of effort and a huge investment to achieve this goal. On the other hand, one Corporate Trade deal can easily add $500,000 to EBIT with minimal effort.

How?

A Corporate Trade transaction helps companies avoid inventory write-offs. Instead of getting ten or twenty cents on the dollar for unwanted inventory through a liquidator, the full value of the inventory is maintained on financial statements and the company avoids a hit to the bottom line.

A real-world example

Let's look at ConAgra as a real world example. This company used Corporate Trade to fund an out-of-home advertising campaign. They wanted to try a new creative approach in the campaign, but did not have the cash flow to make it happen.

Funding innovation in media and marketing is challenging for most companies, especially when the finance department controls the dollars. In ConAgra’s case, they combined existing Trade Credits with cash to pay for the campaign and kept the business moving without committing 100% operating cash to the effort.

Don't risk your company's future by not having enough operating cash flow. If you have assets that are not providing any return, look at Corporate Trade. You can use the cash it frees to keep your company moving forward.

 

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Topics: The Bottom Line

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