What is Factoring Receivables
Accounting for Factored Receivables
Journal Entries for Factored Receivables
Can Factoring Be Better Than a Bank Loan?
History of Factoring
Factoring is Not for My Company
The What, When, and Where About Factoring
How Factoring Can Make or Save Money
Opportunity for Discounts:
Lack of cash flow frequently causes a business to miss out on discounts offered by suppliers. Not taking advantage of these discount opportunities results in paying a higher cost of goods. Plus, many suppliers will negotiate even higher discounts for a customer who demonstrates the ability to consistently pay in cash within the discount period. Generally the best price is not the published price or terms. Rather, the best price is the negotiated price. This price is based on increased volume and negotiated terms backed by cash or quick pay. So, taking advantage of discounts gives a business the ability to add as much as 2 to 5 percent to its gross profit margin.
Administrative and Clerical Costs:
The clerical and data entry costs used in the physical processing of accounts are additional cost factors. Examples of physical processing include generating and stuffing statements. Depending on the size of the company and relative size of the accounts receivable, this may involve a full time employee, a larger accounting staff, or a current employee handling this responsibility as part of a diverse job description. The labor costs involved come into play on both ends. It includes:
- The labor involved in generating and sending the statements
- The administrative duties of receiving and posting account payments
Postage and printing costs add up when companies produce and mail large numbers of multi-colored statements on a regular basis. You must also consider these costs.
Many overlook management’s time. In addition, many often overlook the missed opportunity of time spent doing something more productive. Reviewing accounts, placing calls to late-paying customers, and generating reports for analysis are all time consuming tasks involved in managing receivables and controlling cash flow.
Possible growth opportunities missed due to a lack of cash flow should also be taken into account when analyzing receivables management. Adequate cash flow is the single most important factor in achieving and sustaining business growth aside from market opportunity. Most businesses would have an extensive list of opportunities for growth and expansion to pursue if all receivables on the books were paid in cash today. Some examples of what could be accomplished if a company had access to cash instead of carrying customer debt include the following:
- Bidding on new jobs
- Investing in new equipment
- Expanding the sales force
Furthermore, inadequate cash flow is like wearing handcuffs when it comes to growing a business. Improved receivables management, resulting in money in the bank and less or no debt, creates the environment and the attitude to set a goal and achieve the next level of growth and success.
Contributing Cost Factors
Once all contributing cost factors are estimated and totaled on an annualized basis, divide this number by total annual sales to determine a quantifiable cost for managing accounts receivable as a percentage of sales.
Providing commercial customers with payment terms is a necessary part of doing business and an essential component of building good customer relationships. Performing this type of analysis on a regular basis highlights areas for additional savings and increases efficiency. In addition, knowing the actual cost of managing receivables and controlling cash flow allows for the implementation of more effective management strategies for the business as a whole. There are options available in the marketplace to help improve cash flow and receivables management, such as accounting consultant services, cash flow management systems, and factoring programs. Analyzing the true cost of receivables management is the first step in determining if these options make sense for a business by ultimately improving its bottom line.
If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.