Important Working Capital Terms

Accounts Payable (AP, Payables)

Accounts payable” (AP) refers to an account within the general ledger that represents a company’s obligation to pay off a short-term debt to its creditors or suppliers. Another common usage of “AP” refers to the business department or division that is responsible for making payments owed by the company to suppliers and other creditors.

Accounts Payable (AP) Finance

Accounts payable finance (see supply chain finance) refers to lending that concentrates on the payment of supplier invoices. It enters into the working capital cycle at an earlier point in the supply chain than other finance products, providing funds as and when required to fund opportunities, and pay suppliers and other creditors.

Accounts payable finance relies on the ability of the buyer business to repay the credit supplied, and does not rely on supplier or customer capacity or credit status. Businesses can take as much cash as required up to their assigned credit limit in order to pay whatever supplier invoices they choose. at a predetermined time of their choosing. Credit is usually offered up to 120 days and, once repaid, the revolving facility can be used, repaid and reused in line with the business cash needs.

Accounts Receivable (AR, Receivables)

Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivables are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit.

Accounts Receivable (AR) Finance

Accounts receivable (AR) financing is a type of financing arrangement in which a company receives financing capital related to a portion of its accounts receivable. Accounts receivable financing agreements can be structured in multiple ways usually with the basis as either an asset sale or a loan.

ACH

The Automated Clearing House (ACH) Network is an electronic funds-transfer system run by the former National Automated Clearing House Association (NACHA) since 1974.

The ACH payment system provides ACH transactions for use with payroll, direct deposit, tax refunds, consumer bills, tax payments, and many more payment services in the U.S.

Advance / Early Payment

Advance/early payment is a type of payment made ahead of its normal schedule such as paying for a good or service before you actually receive it. Advance payments are sometimes required by sellers as protection against nonpayment, or to cover the seller’s out-of-pocket costs for supplying the service or product.

There are many cases where advance payments are required. Consumers with bad credit may be required to pay companies in advance, and insurance companies generally require an advance payment in order to extend coverage to the insured party.

Advance Rate

In the context of accounts receivable finance, an advance rate is the percentage of an invoice that a lender will advance upfront, typically between 70-90 percent.

Asset-based Lending

Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower.

The asset-based lending industry serves business, not consumers. It is also known as asset-based financing.

Assignment

In finance, assignment is the transfer of ownership or interest in a payment obligation between two or more parties.

Availability

In finance, availability refers to the total amount of money available to a client by a lender. Clients can transfer these funds into their company bank account at any time.

Balance Sheet

The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure. In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculating financial ratios.

Bill of Exchange

A bill of exchange is a written order used primarily in international trade that binds one party to pay a fixed sum of money to another party on demand or at a predetermined date. Bills of exchange are similar to checks and promissory notes – they can be drawn by individuals or banks and are generally transferable by endorsements.

Bill of Lading

A bill of lading (BL or BoL) is a legal document issued by a carrier to a shipper that details the type, quantity, and destination of the goods being carried. A bill of lading also serves as a shipment receipt when the carrier delivers the goods at a predetermined destination. This document must accompany the shipped products, no matter the form of transportation, and must be signed by an authorized representative from the carrier, shipper, and receiver.

Bill of Sale

A bill of sale is between a buyer and seller for the purchase of a vehicle or personal property in exchange for cash or trade. The form should only be signed after the transaction has been finalized. The buyer is required to keep an original copy for registration purposes.

Broker

A broker is an individual or firm that acts as an intermediary between an investor and a securities exchange. Because securities exchanges only accept orders from individuals or firms who are members of that exchange, individual traders and investors need the services of exchange members. Brokers provide that service and are compensated in various ways, either through commissions, fees or through being paid by the exchange itself.

Buyer

A buyer is a company that purchases goods or services from suppliers; the supplier’s customer. e.g., a production plant (the buyer) buys supplies from a raw materials supplier.

Capital/Funds Employed

Capital employed, also known as funds employed, is the total amount of capital used for the acquisition of profits by a firm or project. Capital employed can also refer to the value of all the assets used by a company to generate earnings.

By employing capital, companies invest in the long-term future of the company. Capital employed is helpful since it’s used with other financial metrics to determine the return on a company’s assets as well as how effective management is at employing capital.

Cash Conversion Cycle

The cash conversion cycle (CCC) is a metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. Also called the Net Operating Cycle or simply Cash Cycle, CCC attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received.

This metric takes into account how much time the company needs to sell its inventory, how much time it takes to collect receivables, and how much time it has to pay its bills.

Cash Flow

The term cash flow refers to the net amount of cash and cash equivalents being transferred in and out of a company. Cash received represents inflows, while money spent represents outflows. A company’s ability to create value for shareholders is fundamentally determined by its ability to generate positive cash flows or, more specifically, to maximize long-term free cash flow (FCF). FCF is the cash generated by a company from its normal business operations after subtracting any money spent on capital expenditures (CapEx).

Chargeback

A chargeback is a return of money to a payer of some transaction, especially a credit card transaction. Chargebacks also occur in B2B transactions. This type of chargeback occurs when the supplier sells a product at a higher price to the distributor than the price they have set with the end user. The distributor then submits a chargeback to the supplier so they can recover the money lost in the transaction.

Cost of Capital

Cost of capital is a company’s calculation of the minimum return that would be necessary in order to justify undertaking a capital budgeting project, such as building a new factory.

The term cost of capital is used by analysts and investors, but it is always an evaluation of whether a projected decision can be justified by its cost. Investors may also use the term to refer to an evaluation of an investment’s potential return in relation to its cost and its risks.

Cost of Goods Sold (COGS)

Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.

Cost of goods sold is also referred to as “cost of sales.”

Covenants

In legal and financial terminology, a covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out or that certain thresholds will be met. Covenants in finance most often relate to terms in a financial contract, such as a loan document or bond issue stating the limits at which the borrower can further lend.

Credit Risk

Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. Excess cash flows may be written to provide additional cover for credit risk. When a lender faces heightened credit risk, it can be mitigated via a higher coupon rate, which provides for greater cash flows.

Although it’s impossible to know exactly who will default on obligations, properly assessing and managing credit risk can lessen the severity of a loss. Interest payments from the borrower or issuer of a debt obligation are a lender’s or investor’s reward for assuming credit risk.

Customer / Account Debtor

A customer or account debtor is a business or organization that owes money on an invoice purchased by the factor (i.e., the client’s customers).

Data Analytics

Data analytics is the science of analyzing raw data to make conclusions about that information. Many of the techniques and processes of data analytics have been automated into mechanical processes and algorithms that work over raw data for human consumption.

Data Warehousing

Data warehousing is the secure electronic storage of information by a business or other organization. The goal of data warehousing is to create a trove of historical data that can be retrieved and analyzed to provide useful insight into the organization’s operations.

Data warehousing is a vital component of business intelligence. That wider term encompasses the information infrastructure that modern businesses use to track their past successes and failures and inform their decisions for the future.

Days Inventory Outstanding (DIO)

The average number of days that a company keeps possession of inventory before it is sold to customers.

Days Payable Outstanding (DPO)

Days payable outstanding (DPO) is a financial ratio that indicates the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which may include suppliers, vendors, or financiers. The ratio is typically calculated on a quarterly or annual basis, and it indicates how well the company’s cash outflows are being managed.

A company with a higher value of DPO takes longer to pay its bills, which means that it can retain available funds for a longer duration, allowing the company an opportunity to utilize those funds in a better way to maximize the benefits. A high DPO, however, may also be a red flag indicating an inability to pay its bills on time.

Days Sales Outstanding (DSO)

Days sales outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment for a sale. DSO is often determined on a monthly, quarterly, or annual basis.

To compute DSO, divide the average accounts receivable during a given period by the total value of credit sales during the same period and multiply the result by the number of days in the period being measured.

Days sales outstanding is an element of the cash conversion cycle and may also be referred to as days receivables or average collection period.

Debtor Concentration

Debtor concentration refers to the percentage amount of accounts receivable owed by a single debtor, or customer. If you do business with only one customer, your debtor concentration is 100 percent. If a single debtor accounts for one-third of your total accounts receivable, your concentration with that debtor is 33 percent.

Dilution

Dilution is the difference between the face amount of an invoice or group of invoices and what the customer or account debtor actually pays.

DIP Financing

Debtor-in-possession (DIP) financing is a special kind of financing meant for companies that are in bankruptcy. Only companies that have filed for bankruptcy protection under Chapter 11 are allowed to access DIP financing, which usually happens at the start of a filing. DIP financing is used to facilitate the reorganization of a debtor-in-possession (the status of a company that has filed for bankruptcy) by allowing it to raise capital to fund its operations as its bankruptcy case runs its course. DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity, and other claims.

Dynamic Discounting

A sliding discount structure that allows suppliers an option to receive payment from buyers in advance of the invoice date. The earlier the payment, the more the invoice total is discounted. Unlike supply chain finance, capital is generally provided directly from the balance sheet of the buyer instead of a third-party funder.

Early-Payment Program

An early-payment program is a standardized program where a buyer offers suppliers a discount on invoices in exchange for early payment. These programs are typically deployed through an online platform set up by the funder.

Export-Import Bank of the United States (EXIM)

The Export-Import Bank of the United States (EXIM) is the official export credit agency of the United States. EXIM is an independent Executive Branch agency with a mission of supporting American jobs by facilitating the export of U.S. goods and services.

When private sector lenders are unable or unwilling to provide financing, EXIM fills in the gap for American businesses by equipping them with the financing tools necessary to compete for global sales. In doing so, the agency levels the playing field for U.S. goods and services going up against foreign competition in overseas markets, so that American companies can create more good-paying American jobs.

Extended Payment Terms

Extended payment terms are a strategy companies use to delay payments of invoices. It is usually a bit longer-than-normal period, which can sometimes exceed 120 days or more.

Factor

A factor is an intermediary agent that provides cash or financing to companies by purchasing their accounts receivables. A factor is essentially a funding source that agrees to pay the company the value of an invoice less a discount for commission and fees. Factoring can help companies improve their short-term cash needs by selling their receivables in return for an injection of cash from the factoring company. The practice is also known as factoring, factoring finance, and accounts receivable financing.

Factoring

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.

Factoring Fee

A factoring fee is the amount charged by the factoring company, that is discounted from your invoice to pay for the factoring service. Rates are calculated based on the period of time an invoice remains unpaid. The rate tends to vary among factoring companies and are dependent on different criteria such as industry, credit worthiness and invoice amount.

Fintech

Financial technology (Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services. ​​​At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.

When fintech emerged in the 21st century, the term was initially applied to the technology employed at the back-end systems of established financial institutions. ​Since then, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management to name a few.

Funder

A funder is a source of capital that advances funds in a supply chain finance program. Funders can be traditional lenders like banks, or alternative lenders like fintechs.

Inventory Finance

The term inventory financing refers to a short-term loan or a revolving line of credit that is acquired by a company so it can purchase products to sell at a later date. These products serve as the collateral for the loan.

Inventory financing is useful for companies that must pay their suppliers for stock that will be warehoused before being sold to customers. It is particularly critical as a way to smooth out the financial effects of seasonal fluctuations in cash flows and can help a company achieve higher sales volumes by allowing it to acquire extra inventory for use on demand.

Invoice

An invoice is a legal documentation providing evidence of goods/services rendered, the amount due for those goods or services, the parties involved in the transaction, and the payment terms of the transaction.

Invoice Discount / Fee

The invoice discount or fee is the percentage taken from the total amount of the invoice in order to receive early payment. This is often confused because of the duality; an invoice discount is actually a ‘fee’ to the supplier because they are accepting a smaller payment in order to get paid faster than the due date. It is a true discount to the buyer because they are in effect paying less for the same goods/services provided.

Know Your Customer/Client (KYC)

The know your customer or know your client (KYC) guidelines in financial services require that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of a bank’s anti-money laundering (AML) policy. KYC processes are also employed by companies of all sizes for the purpose of ensuring their proposed customers, agents, consultants, or distributors are anti-bribery compliant, and are actually who they claim to be. Banks, insurers, export creditors, and other financial institutions are increasingly demanding that customers provide detailed due diligence information. Initially, these regulations were imposed only on the financial institutions but now the non-financial industry, fintech, virtual assets dealers, and even non-profit organizations are liable to oblige.

Lender

A lender is an individual, a public or private group, or a financial institution that makes funds available to a person or business with the expectation that the funds will be repaid. Repayment will include the payment of any interest or fees. Repayment may occur in increments, as in a monthly mortgage payment (one of the largest loans consumers take out is a mortgage) or as a lump sum.

Line of Credit

A line of credit (LOC) is a preset borrowing limit that can be tapped into at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit.

An LOC is an arrangement between a financial institution and a client that establishes the maximum amount the customer can borrow. The borrower can access funds from the line of credit at any time as long as they do not exceed the maximum amount (or credit limit) set in the agreement.

Liquidity

Liquidity refers to the efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. The most liquid asset of all is cash itself.

Non-Recourse Factoring

Non-recourse factoring means the factoring company assumes most of the risk of non-payment by your customers. Non-recourse does not necessarily protect your company from all risk, though. There are usually stipulations associated with non-recourse factoring, and the situations in which you are not responsible for customer non-payment are very specific.

For example, many factoring companies offer non-recourse that only applies if a debtor declares bankruptcy. And they will limit non-recourse agreements to debtors that have a good credit rating, meaning the debtors’ bad credits ratings (who are at the highest risk of non-payment) aren’t even eligible for non-recourse. Because non-recourse agreements typically have a higher factoring rate (sometimes by a full percentage), it’s important to determine whether the higher rate is really worth the cost.

Novation

Novation is the replacement of one of the parties in an agreement between two parties, with the agreement of all three parties involved. To novate is to replace an old obligation with a new one.

For example, a supplier who wants to relinquish a business customer might find another source for the customer. If all three agree, the contract can be torn up and replaced with a new contract that differs only in the name of the supplier. The old supplier relinquishes all rights and obligations of the contract to the new supplier.

For example, many factoring companies offer non-recourse that only applies if a debtor declares bankruptcy. And they will limit non-recourse agreements to debtors that have a good credit rating, meaning the debtors’ bad credits ratings (who are at the highest risk of non-payment) aren’t even eligible for non-recourse. Because non-recourse agreements typically have a higher factoring rate (sometimes by a full percentage), it’s important to determine whether the higher rate is really worth the cost.

Novation

Novation is the replacement of one of the parties in an agreement between two parties, with the agreement of all three parties involved. To novate is to replace an old obligation with a new one.

For example, a supplier who wants to relinquish a business customer might find another source for the customer. If all three agree, the contract can be torn up and replaced with a new contract that differs only in the name of the supplier. The old supplier relinquishes all rights and obligations of the contract to the new supplier.

Obligor

An obligor, also known as a debtor, is a person or entity who is legally or contractually obliged to provide a benefit or payment to another. In a financial context, the term “obligor” refers to a bond issuer who is contractually bound to make all principal repayments and interest payments on outstanding debt. The recipient of the benefit or payment is known as the obligee.

Off-Balance Sheet

Off-balance sheet (OBS) items is a term for assets or liabilities that do not appear on a company’s balance sheet. Although not recorded on the balance sheet, they are still assets and liabilities of the company. Off-balance sheet items are typically those not owned by or are a direct obligation of the company. For example, when loans are securitized and sold off as investments, the secured debt is often kept off the bank’s books. Prior to a change in accounting rules that brought obligations relating to most significant operating leases onto the balance sheet, an operating lease was one of the most common off-balance items.

Over advance

An over advance is a short-term loan that a company takes out in order to buy more material for its inventory immediately before a period of increased sales. A company may use an over advance to finance its expected increase in sales.

Payment Terms

The conditions of a sale. Most commonly refers to the time until an invoice is due, such as net 60.

“Net” means that the full amount is due for payment. Thus, terms of “net 20” mean that full payment is due in 20 days. Discount terms are provided as a two-part statement, where the first item is the percentage discount allowed, and the second item is the number of days within which payment can be made in order to receive the discount. Thus, terms of “1/10” mean that a discount of 1 percent can be taken if payment is made within 10 days. The abbreviation “EOM” means that the payer must issue payment within a certain number of days following the end of the month. Thus, terms of “net 10 EOM” mean that payment must be made in full within 10 days following the end of the month.

Platform

A technology-based solution, usually in the form of websites and applications, that are accessible through some sort of user interface. LSQ FastTrack is our working capital and payments-management platform.

Purchase Order Finance

Purchase order (PO) financing is an arrangement where a third party agrees to give a supplier enough money to fund a customer’s purchase order.

In some cases, purchase order loans will finance an entire order while in other cases they may only finance a portion of it. When the supplier is ready to ship the order, the purchase order financing company collects payment directly from the customer. After subtracting their fees, the company then sends the balance of the invoice to your business.

Purchasing Card (P-Card)

A purchasing card (P‑Card) is a type of commercial card that allows organizations to take advantage of the existing credit card infrastructure to make electronic payments for a variety of business expenses (e.g., goods and services). In the simplest terms, a P-Card is a charge card, similar to a consumer credit card.

Recourse Factoring

Recourse factoring is an agreement where a company sells its current invoices to a factoring company with the understanding that the company will buy them back if they go uncollected. This factoring plan is generally affordable since the company is agreeing to absorb some of the risk involved in the transaction.

Reverse Factoring

See supply chain finance.

Risk Management

In the financial world, risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment, such as a moral hazard, and then takes the appropriate action (or inaction) given the fund’s investment objectives and risk tolerance.

Supplier

A supplier is a company that sells goods or services to a buyer. In supply chain finance, suppliers are enrolled in an early-payment program to receive an advance payment on their invoices to specific buyers.

Supply Chain

A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources. The supply chain also represents the steps it takes to get the product or service from its original state to the customer.

Companies develop supply chains so they can reduce their costs and remain competitive in the business landscape.

Supply Chain Finance

Supply chain finance (SCF) is a term describing a set of technology-based solutions that aim to lower financing costs and improve business efficiency for buyers and sellers linked in a sales transaction. SCF methodologies work by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under this arrangement, buyers agree to approve their suppliers’ invoices for financing by a bank or other outside funder. By providing short-term credit that optimizes working capital and provides liquidity to both parties, SCF offers distinct advantages to all participants. While suppliers gain quicker access to money they are owed, buyers get more time to pay off their balances. On either side of the equation, the parties can use the cash on hand for other projects to keep their respective operations running smoothly.

Supply Chain Finance Marketplace

A supply chain finance marketplace is an auction-style platform where certain supply chain finance programs invite 3rd party Funders to bid to purchase invoices for early payment. This results in uncertain early payment costs for Suppliers, unlike non-marketplace platforms, like LSQ, that use fixed rates.

Trade Finance

Trade finance refers to financial solutions that bridge the funding gap between paying suppliers and receiving buyer payments during international trade. These payment gaps are caused when a supplier (or exporter) requires the buyer (an importer) to prepay for goods shipped, the buyer may wish to reduce risk by requiring proof from the supplier that the goods have shipped.

Virtual Card (V-Card)

Virtual Cards are electronic one-time use card numbers you can generate and set to a specific purchase amount, supplier and time period.