How Generating More Free Cash Flow Can Help Your Enterprise Enter the 2000 Cr Club

Free cash flow (FCF) is important for any business as it represents the surplus cash available for shareholders, similar to savings for a household. FCF is an indicator of a company's financial health and its ability to generate excess cash beyond essential expenditures. Companies can generate more Free Cash Flow by using financial options like Supply Chain Financing.

If you are an entrepreneur or a business leader looking to grow your business, here is a roadmap for you to hit the 2000 Cr mark. Achieving this milestone requires a combination of strategic planning, financial management, and operational excellence. One key factor that can help your enterprise enter the 2000 Cr Club is generating more free cash flow.

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This blog post will explore how generating more free cash flow can help your enterprise enter the 2000 Cr Club. 

We will discuss the benefits of free cash flow and a strategy for increasing it. By the end of this post, you will better understand how free cash flow can help your enterprise achieve its growth goals and enter the 2000 Cr Club.‍

First, What is free cash flow?‍

Free cash flow (FCF) signifies the cash a company generates after deducting both capital expenditures and operating expenses. This metric holds paramount importance for investors, serving as a key tool to assess a company's financial well-being and its potential for growth.

In mathematical terms, FCF is calculated as CFO (Cash Flow from Operations) minus Capex (Capital Expenditures):

FCF=CFO−Capex

Considered the cornerstone of any business, FCF represents the surplus or discretionary cash available for shareholders. Much like savings for a household, FCF underscores a company's ability to generate excess cash that can be utilized for various purposes, including reinvestment, dividend payments, debt reduction, or pursuing new growth initiatives.

What Makes Free Cash Flow so Important?‍

In the business world, cash is king, and a company's standing is often measured by the amount of cash it holds. Therefore, Free Cash Flow (FCF) emerges as a vital metric for evaluating the financial health and resilience of your business.‍

Free Cash Flow can make way for more investments:

• Companies with ample free cash flow can seize growth opportunities, such as expanding into new markets, developing innovative products, or acquiring other businesses.
• This financial flexibility is particularly crucial for aspiring members of the elusive 2000 Cr Club, as it allows them to strategically invest in avenues that contribute to revenue growth and market prominence.

It pays off Debt:

• High levels of debt can impede a company's financial health. Free cash flow offers the means to pay down debt, improving credit ratings and reducing interest expenses.
• For companies aspiring to join the 2000 Cr Club, reducing debt not only strengthens financial metrics but also positions the enterprise favorably in the eyes of investors and financial institutions.

Keeps Shareholders happy:

• Strong free cash flow enables companies to reward shareholders through dividends or share buybacks.
• Distributing dividends and implementing share buybacks enhances shareholder value, a factor that is often closely monitored by investors and market analysts when evaluating a company's eligibility for exclusive financial clubs like the 2000 Cr Club.

Offers Financial Stability:‍

Robust free cash flow provides a safety net for companies during economic downturns or unexpected financial challenges, contributing to a sustainable and secure business model.

‍Competitive Advantage:

• Companies boasting strong free cash flow enjoy a competitive edge over their industry peers.
• This advantage extends to their ability to invest in growth, reduce debt, distribute dividends, and navigate economic uncertainties, all of which are essential attributes for enterprises aiming to break into exclusive financial milestones like the 2000 Cr Club.

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How to Free Up Cash Flow?‍

While there are numerous strategies that companies can implement to free up their cash flow, one prominent option worth considering is the usage of financial tools like Supply Chain Financing.

Read: How Supply Chain Financing Can Give You A Winning Edge

This approach allows companies to optimize their working capital, negotiate favourable payment terms with suppliers, and enhance overall financial flexibility according to their specific needs.

Supply Chain Financing  (SCF) is a cash flow solution that helps businesses free up the working capital trapped in various stages of Supply chain like unpaid invoices and inventory.

SCF services can enable your business to increase your working capital and, in turn, make it more resilient.

SCF consists of several options that aim to finance suppliers by using invoices and receivables as intermittent collaterals.

Let’s understand this with an example

Let’s assume that ABC manufacturer of steel raw material sells its goods to xyz company on credit terms with a 30-day invoice cycle.

Now, ABC Manufacturing might face a challenge – the gap between delivering its products and receiving payment can tie up a significant amount of working capital, limiting its financial flexibility.

Here are the options available with them: ‍

Supplier Financing‍

The manufacturing company can receive early payment for their invoices by opting for supplier financing, also called factoring.
Here the manufacturer can sell their invoices to a third-party financial institute at a discounted rate or dynamic discounting, and the financial institute will offer an early payment in exchange for a reduced price.‍

Reverse Factoring ‍

Manufacturers can also choose reverse factoring. In this arrangement, the buyer initiates a short-term loan on behalf of its supplier from a financial institution, enabling prompt payment to the supplier which gives the buyer more time to settle the payment with the financial institution. This approach helps manage cash flow effectively for both the buyer and the supplier.

By using this option of Supply Chain Financing, the manufacturer can receive payment for its goods immediately, rather than waiting for the 30-day invoice cycle to end.

To summarize, by adopting SCF, businesses can not only unlock trapped working capital but also position themselves for global competitiveness.

Here we talk about Some examples of Indian Companies that have leveraged Supply Chain Financing  to Free Up cash flow and Boost their Growth‍

A standout illustration of an Indian company harnessing Supply Chain Financing for growth is OSHO Trade.

OSHO Trade successfully generated Free Cash Flow by strategically receiving early payments through the implementation of supply chain financing (SCF).

Leveraging Bizongo's Embedded Financing Platform, OSHO extended payment terms to its suppliers, providing them with the option to expedite payments. This proactive approach allowed OSHO Trade to optimize its working capital and efficiently manage cash flow.

The use of Supply Chain Financing options, particularly the receipt of early payments, played a pivotal role in enhancing OSHO Trade's financial flexibility and contributed significantly to its impressive growth from 20 crores to 700 crores.

Another example is Sagar Asia: ‍

Sagar Asia, a leading manufacturing company, experienced a significant boost in its revenue, achieving a remarkable 50% growth within a year, thanks to Bizongo’s supply chain financing offering. 

Struggling with diverse working capital cycles and cash flow management issues, Sagar Asia found a strategic solution in Bizongo's tailored financing services.

Bizongo’s vendor digitization & financing platform streamlined procurement processes, ensuring timely raw material deliveries, and utilized its financial network to expedite payment disbursals to vendors. This collaboration not only overcame supply chain challenges but positioned Sagar Asia for sustained success, illustrating the transformative impact of Bizongo's Supply Chain Financing on operational efficiency and financial growth in the manufacturing sector.

To conclude, generating free cash flow is a key driver for achieving the coveted 2000 Cr milestone. Leveraging Supply Chain Financing, with its ability to unlock working capital and optimize financial resources, emerges as a valuable tool in propelling companies toward this ambitious goal.