Can factoring your accounts receivable really increase efficiency? There are fees attached to factoring after all, and does invoice factoring really end up being a cost effective answer that genuinely makes a company more profitable?
The simple answer is yes!
Efficiency is the driving force behind success. Our society has come to expect ‘instant’ results. We order products from the Internet, and companies like Zappo’s have set the bar high, and lead us to expect delivery of items we order the very next day. We feel disappointed if we have to wait too long to receive items we sometimes didn’t even know we wanted!
Yet somehow this has not followed through to invoice payment. It is the accepted norm to wait at least 30 days to receive payment. Business owners do not think twice about agreeing to terms of 30 days or longer from their customers. The impact waiting for payment has on cash flow, and ultimately profit, is enormous. Why wait 30-60 days for payment when you can have access to working capital now.
Invoice factoring keeps your cash flow moving. You no longer need to wait for your customers to pay. You have access to your money while still allowing your customers time to pay their invoices. This is not only efficient, it keeps your customers happy, and happy customers keep coming back.
Factoring can provide many different industry solutions. For example, by receiving quick payment of your invoices, you can turn your inventory faster than waiting for enough working capital to maintain production and remain in the black, improving both efficiency and profit.
Consider this basic mathematical example of how your efficiency could be increased by factoring your invoices, it assumes you are investing your profits and not recycling them into the manufacturing process*:
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You manufacture a product that costs you $3,000.00 in materials and labor that takes 10 days to produce
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Your Customer pays $5,000.00 for the product and takes 30 days from delivery to pay the invoice
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You make $2,000.00 profit but are without cash for further production for 40 days (10 days to produce + 30 days to receive payment)
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You produce again once you have received payment
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The same cycle takes another 40 days
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80 days later you have sold 2 items and received $10,000.00
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120 days later you have sold 3 items and received $15,000.00
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In 4 months you have covered your costs and made $6,000.00 in profit
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You are slowly building your business and making money
Imagine if you factored your invoices, even with the costs involved, your efficiency would increase significantly
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Factoring would allow you to manufacture 1 item every 10 days
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Invoice is factored and paid within the 10 day production time
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Your customer still takes 30 days to pay and is happy
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In 40 days you would have produced 4 items instead of 1
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Your profit in 40 days would increase from $2,000 to $8,000
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80 days later you have sold 8 items and received $40,000
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120 days later you have sold 12 items and received $60,000
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In 4 months you have covered your costs and made $24,000 in profit
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Your profits have increased from $6,000 to $24,000
The process of factoring could potentially have increased your profits by $18,000 in a 4-month period. Imagine if you decided to use your profit to increase the production cycle:
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In the first example you could manufacture 2 more items and increase your profit by a further $4,000
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In the second example you could manufacture 8 more items and increase your profit by a further $16,000
Obviously this is a simplified example of manufacturing funding, and as your company grows, so will your cost of doing business, but it more than adequately demonstrates how any factored invoice allows you to optimize production and therefore generate new sales. Factoring really is the best cash flow secret for your business
Please contact Bay View Funding for a detailed explanation as to how invoice factoring can help increase your efficiency.
*This example does not factor in any type of bank loan or private investment in the company, aside from the initial investment to manufacture the first product. Fees are also not taken into account, this example simply identifies the potential cost savings related to factoring your accounts receivable.
