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Maximizing Your Bottom Line In 3 Simple Steps

Sales are great, but wouldn’t they be better if you were actually able to reap the rewards? Many CEOs that were not trained with an accounting/finance background struggle to understand profitability. They think that if sales are great, then the business is great. But when sales increase, inventory and overhead increases. Productivity also decreases – due to exhaustion or overwork. Collections lapse because there isn’t a “pressure” to collect. And unfortunately, that is when companies suffer the most. Sales start to decline, but they don’t change their habits. In this Wiki, you will learn how everything below sales on your income statement is critical to your company’s success and how you should be maximizing your bottom line – net income – at any stage of your company’s life cycle. Let’s look at how maximizing your bottom line in 3 simple steps can happen.

What is the Bottom Line?

First, what is the bottom line we are referring to? It is the net income on your income statement or P&L statement. This is what you have left after all the costs of goods sold, administrative expenses, and overhead have been subtracted from revenue. We look at this number carefully because that is how much you are able to put into retained earnings or reinvest back into your company. In addition, the amount can be used to issue dividends to their shareholders. Maximizing your bottom line should be an integral part of your company’s processes.

Profitability starts at the top of the income statement. If your prices are not set to create profitable environment, then you will be not able to maximize the bottom line. Learn how to price for profit using our Pricing for Profit Inspection Guide.

Maximizing Your Bottom Line In 4 Simple Steps

There a are several ways to maximize your bottom line – some more extensive and time consuming than other. But there are 3 areas to focus on to maximize your bottom line – including productivity, overhead, and collections.

1. Productivity is Key

It’s been a common theme among business blogs and news sources (Entrepreneur, Forbes, WSJ, etc.) to improve productivity. Why? Because productivity is key in maximizing your bottom line. But what really happens when you improve productivity? You have more supply, decrease the cost to produce 1 unit, and increase sales. It speeds up your operations so that you can fulfill more orders for quickly.

2. Manage Overhead

Great revenues have very little meaning if your overhead costs are not properly managed. Look deeper into your overhead expenses and find out if there are any costs you can reduce or completely remove. The problem is often more complex than large expense accounts on the P&L. You must interact with various departments to think critically and solve problems. Ensure that every single overhead cost is necessary to provide the desired service levels. Maximum controllability over costs leads to higher profits for the company to reap.

3. Collect Quicker

Collections are an important part of business. If a company sells $10,000 worth of product but only collects $3,000, then their cash is tied up in inventory, etc. As a result, they experience a cash crunch. We have worked with clients who were in the same situation and they neglected to ever collect the outstanding balance. Their bottom line suffered, but they didn’t think to look at their collections process. There are two metrics that you can look at to monitor collections and use to collect quicker.

The first metric is DSO. Do you know your Days Sales Outstanding (DSO)? This is a great measurement to know where you are currently and how by making slight adjustments, you can increase profitability. Use the following formula to calculate DSO.

 DSO = (Accounts Receivable / Total Credit Sales) * 365

The second metric to look at is Collections Effectiveness Index (CEI). This is a slightly more accurate representation of the time it takes to collect receivables than DSO. Because CEI can be calculated more frequently than DSO, it can be a key performance indicator (KPI) that you track in your company. If the CEI percentage decreases one month, then leadership are alerted that something is going on. The goal here is to be at 100%.

CEI = [(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) ÷ (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables)] * 100

Another method to collect quicker is to tie receivables to the sales person’s commission. This will not only encourage your sales team to be part of the collections process, but it will help keep your company cash positive.

Effective Strategies for Improving Profitability

While we’ve been focused on maximizing your bottom line as your current financials stand, we also wanted to share some effective strategies for improving profitability.

Price for Profit

Are your prices leading to a satisfying net income?  If not, then these are some questions you can inquire:

  • Are additional costs being reflected on the price?
  • Are you using Margin vs Markup interchangeably?
  • Is your overhead being covered?

The solution might be simple: Adjust your price!

Learn how to price for profit using our Pricing for Profit Inspection Guide. This whitepaper will help you identify if you have a pricing problems and how to fix it.

Create Standard Operating Procedures (SOP)

Also, create Standard Operating Procedures (SOP). SOPs are step by step instructions written by a company to assist employees in completing routine procedures. They are necessary in a company to ensure operations run smoothly. The better your company’s SOPs are, the more efficient it will run. Create operating procedures that are simple, easy to read, and most importantly make them lead to a purpose.

Focus on Profitable Customers

Identifying profitable customers is instrumental to a company’s success. Once you completely identify your most profitable group of customers, focus your attention on them. Use your marketing funds primarily on you most profitable customers. A customer outside of that target market is still a viable customer, but they just shouldn’t receive as much marketing attention since they are not their primary and most profitable customer segment.

When maximizing your bottom line, start with your prices and pricing process. Access the free Pricing for Profit Inspection Guide to learn how to price profitably.

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Why Use a 13-Week Cash Flow Report as a Management Tool?

Why use a 13-Week Cash Flow Report as a management tool? Cash is king! This applies to any and all companies. No matter the size or industry, cash and cash flow are critical to any operation. Yes, some companies have access to lines of credit and other forms of financing, but that is debt that must be repaid at some point.

So if cash is so important, then why do not all companies use a rolling 13-week cash flow forecast?  We have had many clients over the years. And some, but not all, use a 13-week cash flow report as a management tool that is updated every week. Once the process is started, it is actually a fairly easy tool to keep updated.

Cash is critical to a company’s success. Click here to access our 25 Ways to Improve Cash Flow whitepaper and start improving cash flow today.

Establish a 13-Week Cash Flow Report

The first thing we do with every client is to make sure they establish a 13-week cash flow forecast if they do not already have one. And usually, the first thing we are told by someone at the client office is “our business is special, forecasting when we collect cash is almost impossible to predict”. I hear this way to often and you know, we have never failed at implementing a 13 week cash flow forecast.

13-Week Cash Flow Report as a Management ToolThe Purpose of the 13-Week Cash Flow Report as a Management Tool

The 13-week cash flow report is not meant to me an exact measure of what cash balance will be at the end of every week. On the contrary, it is a forecast. That means the actual results will be different from your forecast, especially in the later weeks. But what the cash flow forecast does tell you is your trend for ending cash balances. It actually does give you an estimate of what your cash balances will be. It is true that weeks 1,2 and 3 forecast are more accurate than weeks 11, 12 and 13.  But it does not take away that it provides some visibility as to where cash will end up.

The 13-week cash flow forecast is useful to a company that is financial distress and to a company that is flush with cash. That is because a company that is in financial distress must be able to determine what costs they need to cut in order to achieve a cash neutral position. A company that is cash rich, needs to know how flush they will be with cash to project things like capital expenditures or shareholder distributions. Either way, the company must have an idea of where they will be over the next 13 weeks. Why 13 weeks? Because that captures an entire 3 months, one full quarter. Being able to have an idea of where you want from a cash position in the next 3 months allows time for planning and decision making.

Do you need help putting together your 13-week cash flow report? Access our template and how to use it (and so much more) in our SCFO Lab. Learn more about the SCFO Lab here.

Cash Collections

It is interesting how many times we have implemented a 13 week cash flow forecast, then we look into why the cash actually collected is way off in weeks 1,2 and 3. Then we dig and find out that the actual cash collection process is poor or non-existent.

Case Study

I was part of a Chapter 11 bankruptcy process a couple years ago. The first thing we did was implement a 13 week cash flow forecast. This is something any CRO would do. When asked about cash collections, the CEO told me that the sales team (7 people) handle collections with their respective client relationships. When we were way off on week 1 and 2, I asked the sales people why we are off?  What are they doing to follow up on late accounts receivable (A/R)?  The response from everyone on the sales team was that they do not handle calling to collect invoices and outstanding A/R.  They stated that the accountant makes those calls and follows up with old A/R.  When I asked the accountant, she said the sales guys collect old A/R.

No one was following up with collections of old A/R. I initiated a daily phone call with all the sales people and assigned clients to call on and follow up on old A/R. We started with daily calls. And we saw some progress, then we went to every other day, then weekly calls. Over then next 5 weeks the company collected $2.7 of $3.2 million dollars in old AR.

So How Do You Start Using a 13-Week Cash Flow Report?

Week 1,2,3….13

Create a template that has a direct method cash flow statement.

Cash In –         Cash from accounts receivable

Then list cash from work not invoiced yet (this would be in the outer weeks)

Cash Out–       Major lines of operating expenses

Payroll

Other

On a weekly basis, pull A/R and A/P from your accounting system. Then link the individual items to the line items in the cash flow forecast. Don’t forget payroll totals.

Include a section below operations for CAPEX activities and another section for Financing Activities.

End cash balance by week

Cumulative cash balances by week

Have one person in your accounting department responsible for updating the 13-week cash flow forecast weekly. Make sure you have a dedicated person/people follow up on collections.  Compare the forecast for each week to the actual cash collections and cash payments – note variances. Then adjust how you forecast.

It is that simple! This tool will buy you peace of mind and allow you to have insight on your cash trends. You need to know this no matter the size of your company or your industry. Do not get frustrated; your first 3-4 weeks are a learning process. Your forecast WILL be off. Make adjustments and understand your variances. Before you know it, you will have a good feel for what your cash trends are. If you are strapped for cash now, click here to access our 25 Ways to Improve Cash Flow whitepaper. Make a big impact on your company today with this simple checklist.

13-Week Cash Flow Report as a Management Tool
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Turnover in Collections is Destroying Your DSO

One of our clients called us up because his DSO went from 34 days to over 72 days within a couple months. He couldn’t figure out what was causing his daily sales outstanding (DSO) to increase so dramatically in such a short time. When we came in the office to investigate, we found that there was significant turnover in the A/R and A/P staff. As a result, collections were not being consistently collected on. Turnover in collections is destroying your DSO. But how does turnover impact your DSO?

Turnover in Collections is Destroying Your DSO

What happens when there is high turnover in a company? Decreased productivity, bad communication, reduced training, lost processes, and so much more. When we started working with our client mentioned above, they were turning over A/R personnel very quickly. At first, the management didn’t think about their DSO. Sales were going great! But no cash was being collected. What they originally thought was a cash flow problem became more of a management issue.

How are you managing your cash? After 25+ years of working with clients in cash crunches, we designed the A/R Checklist AND you can access for free here. Enjoy!

maintaining accurate records

What Happens When Turnover Is High The Collections Departments

Think about what happens when turnover is high in the collections department. Communication is not clear on who has been contacted, what to charge, if an invoice has been sent out, etc. It can easily get out of hand if communication is not seamless during the transition. There simply is no continuation and follow up.

You also need to address why turnover is high. Are you firing your employees? Are many employees retiring? Is morale down due to an upcoming transition? Are you not compensating them enough to stay? There is typically a reason for high turnover. But it may take some investigating. Do you have a good idea for what is an acceptable turnover rate?

Consider calculating the transaction turnover per A/R employee. If your number is low, you need to start improving the collections process.

      Number of Transactions Processed      
Number of Accounts Receivable Employees

Collections Cannot Be Automated

There’s a lot of things you can automate, but collections are not one of them. You cannot automate human behavior and nothing can replace a live call or meeting between two parties. While we may see some sort of automation built into this process, we don’t foresee it taking the humans out of this role. For example, if a client needs to explain that they need to extend their payment another week, they need a speak to a person, someone authorized to extend payment terms. Furthermore, if their contact person in A/R keeps changing, then those receivables will not be collected timely.  Management often underestimates the importance of having someone in receivables developing a relationship with the customer.

[HINT: Turnover may be high for a myriad of reasons, but your company still needs cash. Consider offering a discount to the client for paying in a certain number of days. Read more about discounting receivables here.]

 

How to Save Your DSO When Turnover is High

Your DSO is a key indicator for management to look at. But like other indicators, you need to know what impacts those variables and why. Employee turnover in A/R can directly impact DSO as those employees are the people responsible for collecting. When turnover is high, communications and processes don’t always get passed down properly or effectively. Let’s learn how to save your DSO when turnover is high.

Know the Cycle

First, you need to know the cycle. Companies (and economies) going through cycles where cash is tight, turnover is high, and credit becomes tight. .  Look at the recent oil & gas crisis. Oil price hit record highs, companies began to spend more, they took on more debt. Then the price of oil drops, companies find themselves paying for debt service based on a bigger size and larger revenue, cash gets tight.  The bank and other creditors tighten up until things get better down the road.

But if you’re experiencing high turnover that doesn’t reflect what the macro economy is doing, then you need to look internally.

Start by tracking your DSO at regular intervals. Make this part of your normal monthly reporting process.  This will give you a basis to predict cash flow and indicates when things are going south. When you create a DSO trend, it is easier to spot irregularity.

Identify Areas With Low Turnover

What areas in your company have low turnover? Is it sales, operations, upper level management, etc.? Identify the areas with low turnover. Regardless of their role in the company, someone needs to collect the cash or the company will be in trouble. For example, you have 5 sales people that have been there for an average of 15 years. Your A/R department has turned over 5 employees in the last 2 years. Choose one of your sales persons to manage the transition between A/R employees. Your sales people often have the relationship with the customer.

Write Down Your DSO Improvement Strategies

This is probably the most important step to saving your DSO when turnover is high. Write it down! A strategy isn’t a good strategy if you don’t write it down. Have written processes for collections as well as notes of what has been done for the entire accounting department will help everyone know where you are at.

Write the collections process down with all your DSO improvement strategies.

Then, write down notes from client conversations, steps in the collections processes. Have frequent internal meetings about collections.  Assign tasks to individuals and write down the progress or lack of progress.  The CFO should be made aware of collections, DSO and trouble accounts.

Improve Your DSO

Whether you are experiencing high turnover in your A/R staff or not, it’s important to continually improve your DSO. For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

Turnover in Collections is Destroying Your DSO, Turnover in Collections

Turnover in Collections is Destroying Your DSO, Turnover in Collections

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Collection Effectiveness Index (CEI)

See Also:
CEI vs. DSO
Key Performance Indicators (KPI’s)
How Does a CFO Bring Value to a Company?
5 Stages of Business Grief

Collection Effectiveness Index (CEI)

The Collection Effectiveness Index, also known as CEI, is a calculation of a company’s ability to retrieve their accounts receivable from customers. CEI measures the amount collected during a time period to the amount of receivables in the same time period. In comparison, the collection effectiveness index is slightly more accurate than daily sales outstanding (DSO) because of the time period. A company’s CEI can be calculated for any amount of time, small or large. Conversely, DSO is less accurate with shorter time periods, which is why DSO is calculated every 3 to 6 months.

The Collection Effectiveness Index Formula

Collection Effectiveness Index

The formula consists of the sum of beginning receivables and monthly credit sales, less ending total receivables. Then, divide that by the sum of beginning receivables and monthly credit sales, less ending current receivables. The value is then multiplied by 100 to get a percentage, and if a CEI percentage is close to or equals to 100%, then that means that the collection of accounts receivables from customers was most effective.

(Are you look for more ways to improve your cash flow? Click here for the free complete checklist guide to improve your cash flow!)

CEI and Your Business

The collection effectiveness index is one of the most useful tools a company can use to monitor the business financials. It measures the speed of converting accounts receivables to closed accounts, which then indicates new methods or procedures one can use to retrieve accounts receivables even more. If the CEI percentage decreases, then that’s a key performance indicator that the company needs to put in place in policies or investigate the departments in more detail.

How to Increase a Company’s CEI

Among other ways to reduce accounts receivable, the collection effectiveness index alerts when and how to change the process of retrieving those accounts. By monitoring cash in a company more frequently, financial leaders will notice a pattern and are more inclined to make a change quicker. Changing your policy from checking 3 times a year to 6 or 8 times a year, and the results that come from it, will show a substantial difference in a company.

Collection Effectiveness Index

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Broken Debt Covenants?

It’s almost that time again…  quarterly debt covenant reporting.  Is your company going to have some explaining to do?  If so, you’re not alone.

Banks generally set 3-4 key covenants on their loans.  These covenants serve as “tripwires” that alert the bank to potential trouble ahead.  Most companies don’t bust all of them, but many find themselves out of compliance with at least one of them at times.  This is particularly true in a soft economy like we’re seeing in Houston these days.

The most common broken debt covenant we see in this environment is the Debt Service Coverage Ratio (DSCR).  Mathematically, DSCR equals:

DSCR=EBIT/(Interest +(Principal/1-Tax Rate))

In English, DSCR is equal to Net Operating Income divided by the cost to service the company’s debt.  It basically measures your company’s ability to make its debt payments.  You can see why this covenant is especially important to your banker

Impact of Broken Debt Covenants

What does it mean to have broken debt covenants?  Worst case, the bank can call your loan.  Generally speaking, banks don’t want to do this, especially if it’s not part of a troubling pattern for your company.  The more likely scenario is that your credit line could be frozen and your company will need to start surviving off only the cash flow generated from operations.

If you find yourself in the situation described above, don’t panic.  By making a few changes, your company can free up cash flow to get a little breathing room until things turn around.  Here are a few examples:

Ask key vendors to stretch their terms – Your vendors don’t want to own your company.  When cash is tight, most vendors will work with you if you as long as you are willing to make regular payments, even if it’s not by the due date.

Have a designated collections person – Nobody likes making collection calls, so unless collections is someone’s job, it’s no one’s job.  Having a dedicated collections person ensures that customers are paying within terms or have made arrangements to pay out past-due invoices, ensuring that your business has the cash to fund operations.

Invoice immediately – It may not seem like much, but getting your invoices out even a couple of days sooner can free up a considerable amount of cash.  Make sure you get them out right away and that they are clear and easy-to-read to avoid payment delays.

Looking for more ideas to help free up cash?  Click the link below to download our free list 25 Ways to Improve Cash Flow.

broken debt covenants

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5 Ways to Prepare for Seasonality

four seasonsSeasonality can be brutal.  If your business is like ours, summertime is pretty slow.  The phones don’t ring, employees and clients are on vacation, nobody is available for appointments and not much happens in general.  Even if summertime is busy in your industry, chances are that there are other times during the year that business slows down noticeably.

5 Ways to Prepare for Seasonality

While a slower pace may sound like a dream if you’re coming off of a busy season, a slowdown can cause issues if not anticipated and planned for.  Employees out of the office can impact productivityCustomers unavailable for appointments and silent phones can mean fewer sales.   All of these factors can have a negative impact on profitability and cash flow.  Here are some steps you can take to prepare for these slow times and minimize their impact.

Consider Temporary Staffing

Some businesses do 75% of their work during 25% of the year.  This definitely makes resource management challenging.  Even if your company isn’t in an extreme situation such as this, utilizing temporary staffing can help smooth out seasonal bumps in productivity.  With staffing firms cropping up in more and more industries, the availability of temporary workers is on the rise.  While the short-term cost of these employees may be more than an in-house worker, the flexibility they provide is attractive to companies that aren’t able to carry the burden of excess staff during slow times.

Build Up Your Backlog

What happens to your sales pipeline shortly before quarterly sales bonuses get paid out?  Chances are, you see a sudden spike in closed sales.  What this seems to demonstrate is that our salespeople have some measure of control over the efforts to close their sales.  With this in mind, there are a couple of approaches you can take to ensure that there are enough sales to get you through the slow times.

First, try sitting down with your sales force with a calendar and map out your seasonality.  Awareness of the seasonal dips may be enough incentive to encourage them to build up their backlog prior to these dips.   Assuming that your sales staff will only be motivated by sales commissions, an alternative solution would be to set your bonus payout dates immediately prior to your slow times.

Keep an Eye on Your Inventory Levels

If your vendors experience the same seasonality as you do, they may not have the manpower to keep up with customer orders in a timely manner during their slow periods.  Hitting them with a last-minute rush order may not work out well and going to another vendor will likely yield the same results.  To avoid running out of key materials, make sure that items needed for planned production are ordered well enough in advance to allow for any seasonal slowdowns.

Get a Handle on Cash

During slow times, a business is likely to consume more resources than it produces.  To ensure that your business has enough liquidity to keep things running smoothly during seasonal dips, it’s important to manage cash carefully.  Here are a couple of cash management tips below. For more ideas, check out our free checklist, “25 Ways to Improve Cash Flow.”

Collect Receivables

If you and your customers are on the same sales cycle, chances are that they’ll be short-staffed at the same times you are.  Payment of payables won’t be high on the list when departments are running on a skeleton crew, so make sure that you’re current on collections before things slow down.

Prepare a Cash Flow Forecast

One of the most important steps you can take in managing cash is to prepare a cash flow forecast.  The forecast will tell you when cash will be tight. Then you can work with your banker to ensure that your company has the liquidity it needs.  On that note…

Keep Your Banker in the Loop

Chances are, you are not your banker’s only client.  They likely have many clients across several industries, so they don’t always know when business is slow for your company.  Rather than waiting for your banker to ask you why this quarter’s results don’t look as good as last quarter’s, reach out to them. Do this especially before business slows down to let them know what your projections look like.  While it may seem counter-intuitive to give your banker potentially bad news, your candor will give them confidence in you and make it more likely that they will work with you if you need it.  Besides, you’ve projected that things are going to improve, right?

Regardless of when your slow times fall, taking steps to prepare for seasonal dips can help minimize their impact on cash flow and profitability.  Now is the time to start to identify and address seasonal fluctuations.  After all, the holidays are just around the corner…

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What is Factoring Receivables

See Also:
Another Way To Look At Factoring
Accounting for Factored Receivables
Journal Entries for Factored Receivables
Can Factoring Be Better Than a Bank Loan?
History of Factoring
How Factoring Can Make or Save Money
Factoring is Not for My Company
The What, When, and Where About Factoring

What Is Factoring Receivables?

Factoring receivables is the sale of accounts receivable for working capital purposes. A company will receive an initial advance, usually around 80% of the amount of an invoice when the invoice is purchased by the lender. When they collect the invoice, the lender pays the remaining 20% (less a fee) to the borrower.

There are two types of factoring conditions: 1) Factoring With Recourse and 2) Factoring Without Recourse. The term recourse refers to whether or not the shareholder(s) of the company are personally liable for the factored receivables in case the company’s client(s) don’t payback the invoiced amount. By far most factoring relationships are conditioned upon With Recourse terms. By shifting more of the risk onto the shareholder(s) of the company, the factoring lender is able to then charge lower fees.

Qualifying for Factoring

The first step in receiving factoring financing is to be pre-qualified by a factoring company or a bank’s factoring department. Typically, this will entail an in-person meeting to review why the company is in need of factoring, as well as the provision of a company’s financial statements and supporting schedules (such as receivables and payables aging schedules) to document its operating history. They will also obtain information on the company’s customers.

A proposal for a factoring relationship will be created. This document will outline the proposed terms of the financing, including a facility limit, advance rate, discount fee schedule, repurchase provision, other fees, liens, process for notification of assignment, confirmation of receivables, and reporting requirements.

The proposal will be negotiated between the company and the representative(s) of the lender before being submitted to the loan committee of the lender for approval. Typically for proposed credit facilities of $1 million or more, lenders require a pre-funding audit of the prospective borrower.


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Factoring Operations

In a factoring relationship, all payments collected for accounts receivable are to be sent to the lender, typically to a “lock-box” under their control. Customers are to be notified of this by a Notification of Assignment letter which will also contain the new payment instructions. Invoices sent by the borrower to their customers will be required to contain the new payment instructions as well.

The borrower decides what invoices to factor (“sell”) by notifying the lender, through the use of a document typically known as a “Schedule A” form. This document will list each individual invoice that needs to be factored. It will have details such as the customer name, invoice number, date, amount, and corresponding purchase order or reference number of the customer. The Schedule A is to be accompanied by documentation which substantiates that the goods or services have been provided to the customers. The lender will decide which invoices it will purchase and then will advance funds to the borrower. This advance is based upon an agreed upon advance rate. The rate is typically around 80%.

Discount Fee

Hold the amount not advanced to the borrower in reserve. Then as customers pay the invoices, release the amount held in reserve to the borrower, less a discount fee.

The discount fee is a percentage that a fee schedule determines. The factoring proposal lays out the fee schedule. The fee is a function of the time it takes for the customer to pay the invoice plus a variable component. The variable component is based upon the prime lending rate. The less time it takes to collect, the smaller the fee. Apply the discount fee to the amount of funds advanced to the borrower.

For those invoices not collected within 90 days of the invoice date, a repurchase provision will apply. This requires the borrower to buy back the invoice, along with a late payment fee (around 5%).

Factoring Lender Reports…..What They Give You

Purchases & Advances Report

The lender will provide a Purchases & Advances Report, which identifies the invoices purchased by the lender, along with the advance rate and amount of each invoice advanced to the borrower. This is typically available daily online.

Collections Report

Lenders also provide a Collections Report, which lists all payments received from a borrower’s customers. Remember that the lender will receive and process all payments for a borrower’s receivables. There are two formats for a Collections Report. Format A lists all payments received for a borrower’s receivables and identifies those which apply to non-factored invoices as well as factored invoices. The detail on a Format A report will include the following:

  • Invoice number
  • Invoice amount
  • Date payment received
  • Amount of the payment collected for each invoice

The second format of a Collections Report is Format D. On a Format D report, information about the reserve refund and discount fee paid out of the reserve for a given invoice is also provided.

Reserve Report

The Reserve Report provided by a lender details changes in the borrower’s reserve account. As invoices are paid and processed, the factoring lender will remit the remaining portion of the reserve. This is usually 20% of the leftover invoice, net of fees. Should there be any outstanding invoices that a customer has not paid back within the agreed upon time period, the factoring lender may require the company to buyback that invoice AND still charge a fee. This type of situation is called “with recourse” because the lender can force the company to “buy back” delinquent invoices.

The borrower is usually required to provide monthly financial statements, including A/R and A/P aging schedules, within 30 days of a month’s end.

If you want more ways to add value to your company, then download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

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