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The Trillion Dollar Opportunity

The Trillion Dollar Opportunity

When credit is cheap the incentive to release cash tied up in working capital is reduced. This type of apathy from business owners who have access to cheap debt is evidenced by an increasing cash conversion cycle and debtor days which are essentially static at 55 days.

Should business owners care about generating cash from working capital? Of course - cash unnecessary tied up in inventory and receivables could be used for growth and improved liquidity.

In the USA the amount of cash tied up in excess working capital such as inventory and receivables is over $1 trillion. By comparison excess working capital in Australia is estimated at over $200 billion. Sooner or later interest rates will increase and debt will be less attractive but one thing remains the same: working capital is a significant source of cash. Whether business owners have the willingness to tap their customers for prompt payment is the trillion dollar question.

On the other hand, the banks’ high level of scrutiny on lending means that unlocking working capital from inventory and receivables is essential for business solvency. Otherwise business owners will need to borrow against assets such as property that they don’t have, or are unwilling to provide, in order to ensure certainty and underwrite funding. So how does a business effectively fund the 90 days working capital cycle without leveraging other unrelated assets such as the family home? The alternative, non-bank solutions are debtor finance, factoring, invoice discounting or accounts receivable funding.

Take note: the cost of debt is less important when compared to the economic cost of cash tied up in unused working capital.

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