Freeing up the cash-flow generation

It might seem hard to believe, but many businesses unwittingly become victims of their own success. This happens through growth in sales occurring too quickly and the company's cash-management systems failing to meet the new demands placed on them.

The classic situation is where a company finds sales increasing dramatically. This causes it to hire additional staff, order additional supplies of raw materials and incur higher delivery costs and so on.

On the other side of the equation, the company still has to wait for payment for the additional sales. This can often lead to a situation where a company that previously had a healthy bank balance is plunged into the red and can actually go out of business.

While the success of a business is ultimately measured in terms of profitability, cash is still its lifeblood. Every expanding business, irrespective of its size, strength or nature, needs to ensure that it has adequate working capital. Developing and expanding a business will generally require additional and sometimes significant working capital. Without having access to sufficient working capital, a company that is expanding rapidly can easily fall into the trap of over-trading.

Cash-flow difficulties can occur when there is an imbalance in the value and or the timing between cash coming into the business and cash going out to meet immediate expenditure. This is sometimes known as the "vicious cash cycle" where if the flow is stopped, the business may be at risk.

Cash management is particularly important and all business-funding options need careful consideration. A prudent approach for any company would be to look across the whole cycle of cash flow, as it may be that it would benefit from a mix of different funding options, such as leasing, hire purchase, and invoice discounting.

One of the most exciting developments in recent years in the area of cash-flow generation is invoice discounting or invoice finance and this particular funding option has seen phenomenal growth in recent years.

Invoice discounting is a simple, cost-effective method of raising working capital finance by converting trade debts into cash. Up to 80 per cent of the value of approved invoices can be provided and it is an ideal product for expanding companies.

As sales and debtors grow, so too does the amount of money available. In effect, this means that the company's assets are working for it.

Bank of Ireland Finance (BIF) continues to be a market leader in invoice discounting. The BIF service allows companies to raise finance on the basis of book debts. It provides flexible funding, often far in excess of the levels available through conventional banking products.

By providing working-capital finance, invoice discounting can assist companies with growth ambitions to meet day-to-day cash-flow requirements; fund expansion; fund new market development; fund new product lines; improve their credit rating; finance mergers and acquisitions; and finance management buy-outs.

By availing of invoice discounting, companies can take advantage of business opportunities as they arise. With additional cash resources available, business growth does not cause undue cash-flow pressures. In addition, more advantageous supplier terms and discounts can often be negotiated, thereby improving relationships with both bankers and suppliers.

With the Bank of Ireland invoice finance service the day-to-day administration of the sales ledger will continue to be carried out by the client and the debtors are never made aware of the existence of the invoice-finance facility.

The client also has access to a specialised online invoice-finance communications system. This involves connecting to the bank's computer system, which helps reduce the volume of paperwork as well as allowing transactions and instructions to be transferred electronically.

The system allows a company to, among other things, send debtor information online to the bank; view their account on a transaction-by-transaction basis; understand what the balance available for draw down is; and draw down funds online.

"We in Bank of Ireland Finance are endeavouring to change the perceptions about this product and educate the business community as to its value as a valuable funding mechanism in any growth-oriented organisation," says Pat Gallagher, head of strategy and marketing with Bank of Ireland Finance.

"Invoice finance doesn't replace conventional bank borrowing but it can and does play an important role in providing a flexible and additional line of credit, which provides a greater degree of certainty to cash flow forecasting." He points out that invoice finance can be a valuable means of raising working capital. "Every business should ensure that it has an appropriate mix of funding and in particular should ensure that it has a more permanent type of working capital facility in place," he says. "Many businesses fail to recognise this and instead put too much reliance on either long or short-term debt, or a combination of both, which may not always provide the flexibility a business needs in a competitive environment.We provide a market-leading suite of funding alternatives to fund business growth.

These include asset finance products, such as leasing, hire purchase and fleet management facilities and working capital and cash-flow products, such as invoice finance, Earlypay, a supplier payment facility, professional fee finance, and insurance-premium finance."

Invoice-discounting products have developed considerably over the past number of years, according to Stephen McKenna, sales director with Bank of Scotland (Ireland) Commercial Finance. "The high interest rates of the early 1990s made it quite expensive but it is extremely competitive now and doesn't carry a high price tag at all.

"The range of products available from the different players in the market has made it very competitive. This is bringing new customers into the market and we are seeing larger companies make increasing use of it."

Low interest rates and increased competition have helped to drive the market. "Business is very good at present," says McKenna. "With interest rates so low and quite keen pricing it is a very attractive product. It is also one that tends to do well in both lean and growth times. In lean times companies use it to help cash flow, while in better periods they can use it to fund growth. In this way it is fairly well insulated against downturns. I see no reason why the market won't be as buoyant next year as this."

Increased competition has certainly played a role in popularising the product. "A number of years ago there were just a few players in the market," says McKenna.

"Now, all of the major banks and many others are offering invoice discounting products and pricing has come down. The ultimate winners are the clients who are benefiting from a very attractively priced finance product."