Understanding the Working Capital Funding Gap: A Key to Business Success

Written by Carolynne Walker, Managing Director, Kasvu Inc. for Lexicon Bank

Click here to learn more about Kasvu Inc.

Every business, whether a manufacturing plant, retail store, or service provider, experiences the same fundamental challenge: managing the timing between paying expenses and collecting revenue. This timing difference creates what we call the working capital funding gap.

Understanding Your Business’s Cash Flow Timeline

The working capital funding gap represents the period between when your business pays its obligations and when it receives payment from customers. Think of it as your business’s cash conversion cycle. While the specific timing varies by industry, the pattern remains consistent:

Let’s look at a practical example:

A business purchases inventory on 30-day payment terms. It takes approximately 60 days to convert and sell this inventory, and customers are given 30-day payment terms. Here’s how the timing plays out:

• Day 1: Inventory purchased
• Day 30: Payment due to vendor
• Day 60: Inventory sold
• Day 90: Payment received from customer

In this scenario, the business faces a 60-day funding gap between paying its vendor (Day 30) and receiving customer payment (Day 90).

Smart Strategies to Minimize Your Funding Gap

1. Optimize Vendor Relationships

• Negotiate payment terms that better align with your operating cycle
• Consider early payment discounts versus extended payment terms
• Build strong relationships that allow for flexible arrangements

2. Enhance Customer Payment Practices

• Implement efficient invoicing systems
• Offer early payment incentives
• Consider digital payment options to speed up collections

3. Streamline Operations

• Reduce inventory holding time through better forecasting
• Minimize production or service delivery cycles
• Improve supply chain efficiency to reduce lead times

4. Consider Working Capital Solutions

• Talk to your banking partner about lines of credit
• Explore invoice financing options
• Evaluate supply chain financing programs

Remember: Even highly profitable businesses can face cash flow challenges due to their working capital funding gap. Understanding and actively managing this gap is crucial for sustainable business growth.

Indeed, the example above illustrates a perfect scenario where each party adheres to the schedule precisely! When this occurs, particularly with numerous customers or prolonged conversions, it’s essential to implement a well-structured operating line at Lexicon Bank. When issues arise, it is typically not the best time to apply for a line of credit.

Need Help?

Contact your relationship manager to discuss working capital solutions tailored to your business needs.

Lexicon Bank is committed to helping businesses optimize their working capital cycle and maintain healthy cash flow. We offer various financing solutions designed to bridge your working capital funding gap.

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