Whittling Away Cash Flow Woes

Capital shortfalls are a leading cause of business failure – and even profitable, rapidly growing companies are not immune.

Sourcing from overseas suppliers allows U.S. manufacturers to lower their production costs and grow their gross margins. But working capital challenges can overshadow those offshoring benefits for small and mid-sized industrial buyers.

Pullquote share icon. Share

Paying suppliers in full, prior to shipment, creates a cash-flow challenge that threatens sales growth.

That’s something my company, Teknatool USA Inc., recently discovered when we experienced a prolonged period of rapid sales growth. We sell lathes, drill presses and other woodturning and woodworking tools.

Our network of Chinese suppliers – about 15 companies in all – was producing great materials for us. And they were able to scale up production to meet the increased demand we were enjoying.

But those suppliers also required us to pay them in full before they shipped to us. This created a cash-flow challenge, which threatened to stop our sales growth in its tracks.

Our suppliers’ terms meant that our cash was tied up in inventory for as many as 120 days, as it took 45 to 60 days to deliver the inventory, 15 to 30 days to ship to our customers and another 30 to 60 days to collect from our customers.

A common challenge

It’s a challenge that a lot of companies working with foreign suppliers ultimately confront.

So we looked around for help. Traditional lenders weren’t interested in financing goods on the water. Period.

Alternative financing firms were willing to help us pay suppliers upfront for materials and labor through purchase-order (PO) financing, but their finance charges were prohibitive and their payment terms did nothing to bridge the cash-conversion chasm we confronted without adding AR Factoring – and some of their collateral demands and contractual terms were extreme.

Plus, it didn’t work if you had traditional bank financing and your collateral was tied up.

One firm offering PO financing had a two-page clause in their boilerplate contract that gave them power-of-attorney over our business – and the power to take our business over – even if we didn’t default on the loan. Believe it or not, they would not budge from this contractual term.

Pullquote share icon. Share

UPS Capital Cargo Finance allowed us to borrow up to $1.5 million on in-transit goods for 90 days.

We decided to take a fresh approach to the problem. We reached out to our Chinese suppliers, laid out the growth challenge and asked them for new terms that would allow us to push out payment for their goods to 30 days after the products left port. This would allow us to grow and increase our orders with them.

It took more than one phone call. And at first, the suppliers were only willing to extend terms to 15 days. But we were honest about the issue and firm in our request for 30-day terms.

Ultimately, they came around.

Financing alternatives

Of course, since the goods were still in-transit 45 to 60 days after leaving port – and our cash was still tied up in those goods – the concession by our suppliers didn’t solve our problem completely. But it whittled down our cash-conversion gap from 120 days to 90 days, and that proved to be key.

In the meantime, we searched for financing alternatives that would help us bridge our 120-day cash-conversion challenge without giving the business away. That’s when we learned about UPS Capital Cargo Finance®, which was the perfect solution for Teknatool.

[Image: UPS Capital]

It allowed us to borrow up to $1.5 million on in-transit goods for 90 days via an unsecured credit line that didn’t interfere with our existing banking relationships.

And if that wasn’t enough, there was no collateral requirement so it works with your traditional bank financing. The paperwork was simple – a one-page application with a bill of lading attached. The credit line funded the same day the goods shipped. And the rates were reasonable.

The CFO conundrum

CFOs have a lot of key responsibilities. But none is more important, in my opinion, than cash flow management.

The obvious way to manage cash flow is to delay accounts payable while accelerating accounts receivable, but that just isn’t an option when you have to pay your suppliers before your goods are sold. It’s nice to have business partners like UPS and UPS Capital.

After implementing Cargo Finance, we achieved annual sales growth of 40 to 50 percent and increased profits. UPS was flexible throughout the process and continued to grow my credit line as I grew.

UPS even managed to cut my delivery time down from China by 10 days when I switched from my previous shipper. My partnership with UPS provided a great cash management tool that opened up the opportunity for increased sales and profitability.

The solution I found certainly helped Teknatool achieve our business objectives.

If you have similar business or cash flow challenges, I recommend UPS and their UPS Capital Cargo Finance solution.

For more information on UPS Capital Cargo Finance, visit: https://upscapital.com/product-services/cargo-finance/.

You might also like:

Navigating the New World of Industrial Buying

Don’t Make After-Sales An Afterthought

What American Manufacturers Can Learn From Henry Ford

Tom Walker is CFO at Teknatool USA in Florida and a partner of the Florida CFO Group.

Click the RSS icon to subscribe to future articles by this author. RSS Feed