Invoice discounting enables better cash flow management
IT’S NO SECRET that poor economic conditions and Covid-19 have a significant impact on corporate cash flow.
Debtor difficulties have been a major source of the problem, as business closures have been widely reported. As a result, running a business has become even more difficult, requiring participation in cash flow management programs.
Businesses now have a lot of cash trapped in unpaid invoices, and entities of all sizes are scrambling to figure out how to access those funds to avoid a negative cash flow curve.
Invoice discounting is one method businesses can use to offset negative cash flow.
Simply put, invoice discounting is a debtor management solution that aims to unlock the untapped growth potential of a debtor’s book.
When a business’s unpaid invoices are used as collateral for a loan, invoice discounting is called an invoice financing facility. In particular, this allows them to leverage the value of their sales ledger.
In times of poor cash flow, which has led to businesses closing their doors or laying off employees, invoice discounting is a crucial concept.
According to data from the Ministry of Labour, Industrial Relations and Job Creation, 12,000 people were made redundant in 896 companies in 2020; and 9,158 of these cases were due to economic factors.
When invoices are not paid, the sustainability of the company is threatened and employees suffer.
Managing accounts receivable can be time-consuming and costly. Cash flow is often a matter of timing, and even a profitable business with a good strategy for raising money from customers can experience cash flow pressures and eventually fail.
And at a time when cash flow and debt is currently a pandemic in the operations of various businesses, companies are encouraged to explore all the rescue mechanisms available to them.
A survey by the Namibian Statistics Agency in 2020 indicated that 63.7% of businesses reported a revenue loss of more than 50%, with manufacturing (20.1%), hotels and restaurants (15 .2%) and the construction sector (11.3%) being the most affected.
This came at a time when raising funds from debtors was an almost impossible task due to a slowdown in business operations, as the effects of Covid-19 compounded problems already created by poor economic conditions.
Suppose a business can access cash tied up in bills to be paid.
If possible, the company could negotiate better terms with suppliers or access much-needed working capital.
Increasing cash flow is necessary to allow a business to grow; for example, when bringing a new product to market, financing an expansion, or covering ongoing marketing expenses.
Therefore, in these difficult times, invoice discounting must be at the forefront. And for this to happen successfully, you need the support of a financial institution.
Nedbank Namibia has developed an invoice discount concept suitable for local businesses in difficulty.
Nedbank’s Invoice Discount Program is created with a company’s sustainability in mind, to improve process and cost efficiency. It can also help a company to seize an opportunity, while making it possible to negotiate better banking conditions.
To date, Nedbank’s invoice discounting has freed up to 80% of a company’s accounts receivable book, making it an important solution for struggling companies to consider in order to maintain timely payment of salaries, expenses and supplier invoices.
Many businesses look great on paper or in the public eye, when in reality their existence and future prospects are threatened by cash flow pressures.
These entities are encouraged to turn to bill discounting for assistance.
To stimulate opportunity and growth for cash-strapped businesses, Nedbank’s bill discounting additionally provides an essential source of funding for expansion or the payment of ongoing operational costs.
It is particularly useful in preventing business owners from using their personal assets and savings to keep their business afloat.
A partnership with a financial institution can better equip a business to manage debtors and absorb risk; for an SME it can significantly improve the burden of accounts receivable administration, and for a large organization it can hone the discipline of optimal day-to-day cash management.
* Tjivingurura Mbuende is the Director of Corporate and Investment Banking at Nedbank Namibia.