The Business Finance Blog

Will Factoring Give Your Business More Cash?

Will Factoring give your business more cash? What are the benefits? What are the pitfalls? What is factoring? If you're asking these questions you should read this:

Factoring is a way to get your accounts receivables paid to you as soon as you invoice, not at the end of whatever payment term you offer your supplier (Drum roll sounds). The Factor (the lender) pays you the amount you are owed, less a small percentage (essentially an interest charge) called a discount.

Many fast growing businesses hear about factoring and see it as the Holy Grail of cash flow that removes the working capital (cash) blockage which is cramping their style and potentially slowing their business' growth rate.

The reason growing business' often experience working capital pressure is because the amount they earn from work done, or services performed, or merchandise sold, does not get paid immediately. This money sits out in the businesses accounts receivable as an asset, but the business can't spend it until it actually gets paid.

The trouble is, many of the bills incurred by the growing business have to be paid now, not in 30 or 60 days or whatever.

So the business takes on another client. (Great. More profit, right?) But, the business then has to pay the overheads associated with that client while waiting for their money. This means that if the business takes on the new client it needs to have enough cash available to pay those overheads.

If the working capital is insufficient, something has to give, and normally the business starts to pay suppliers late, potentially damaging supplier relationships.

Factoring allows the business to collect the money much sooner and the business can therefore grow more quickly than when restrained by a shortage of cash.

Sounds fantastic, right?

There are some pitfalls:

Factoring can be dangerous to your business health if the client doesn't pay. You see, before you had factoring, you couldn't spend that money until the client paid you, but with factoring, you can. As the business is growing rapidly the money paid to you for the client invoice isn't just sitting in the bank. When the factor explains that the client didn't pay, you have to repay the factor (slow drum roll now), but the money isn't there!

This issue has sunk businesses. Does it mean you should abandon the Holy Grail entirely? Not necessarily, but be careful, and have your eyes wide open. Do smart risk management things like get deposits and arrange progress draws for large jobs. Don't move to the next stage until the factor advises the first progress payment has been made etc.

Combined with good, cautious invoice management, factoring can help smooth your income and make you more money, but caution is the word.

Graham Couper-Smith
Co-author of 'Recession Proof Yourself'
For more business hints and tips, plus the book 'Recession Proof Yourself', check out our website at:
http://www.manageyourfinance.com.au

Create Positive Cash Flow - Why Banks Worry about fast growing businesses

Sustainable businesses are businesses that have more cash in than cash out. Banks worry about cash flow because they know that loans are paid from cash.

Good cash management means the bills get paid and the business will still be around tomorrow. This article offers a few tips on how to keep that cash flow positive!

It's easy to confuse positive cash flow with a growing business and good profits, but sometimes the two don't go hand in hand. In fact, a rapidly growing business has a particular need for good financial and cash management.

This is because the demands of a growing business are normally reflected in rising overheads some of which cannot be paid on similar terms to the terms the business offers its own clients. E.g. overheads often include rent (which must normally be paid on time), wages (which must be paid when due) and such items as power and phone (utility companies tend not to be receptive to ongoing requests for longer payment terms).

All this means that the money flows rapidly out of the growing business. On the other hand if the business offers even 30 days terms to its customers, the income will be received after the expense must be paid. The bigger the business gets, the more money is involved.

What to do about it?

The simplest solution, often not commercially practical, is to only offer shorter terms for payment. If this won't work (because, for example, your customers would leave and go to a competitor) consider the following ideas:

Offer discounts for early payment (as an incentive).
Accept credit cards that offer valuable points and promote the benefits of these to your customers.
Request deposits for large orders for new clients.
Get some working capital finance.

I mention the finance option last, although the most common solution, because it is also usually more expensive.

If you find the working capital finance is running out, there are 5 common reasons:

You're growing again (see above)
People are paying you more slowly
You are paying your bills more quickly
You are drawing out money for some other purpose
You are making less profit

Item 1 we have addressed above.
Item 2 is easy: identify the problem and use more rigorous collection/billing practices.
Item 3: Don't be so enthusiastic. Don't pay late, but take advantage of the terms offered to you.
Item 4: investigate and fund the purpose some other way, and 5: Figure out why and take action to correct.

All these steps require basic up to date figures and a willingness on the part of the manager to engage with them regularly.

Remember, it's not just important to work in the business, the manager must also work on the business

Positive cash flow is worth the effort, it makes your business sustainable (and keeps your banker happy).

Graham Couper-Smith

co-author of 'Recession Proof Yourself'

The book (and more hints and tips) are available on our website at: http://www.manageyourfinance.com.au for more

The Business Finance Blog

Welcome to the first Business Blog entry for Manage Your Finance.

How many times have you walked into a shop and had an assistant ask you: "Can I help You?"
Your response was probably something like "No thanks, I'm just looking".

The sales assistant has now lost the chance to promote or assist your browsing.

People buy from people they like. The message behind this is don't ask if you can help, build rapport instead.

Let me tell you a story:
I was browsing in a tourist shop in Guam and saw a brilliant example of this displayed by an older Japanese sales assistant (maybe the owner of the store).

My wife and I walked into the shop and the Sales Assistant, looked up, smiled and said "Good Afternoon, welcome." and waived into the store to show us we were indeed welcome. She did not offer to help.

We walked in, and browsed. She heard us chatting after a few minutes, and said, "I know that accent! Your Australians. Welcome to Guam, how long have you been here?"

We had a nice chat with this lady and ended up buying some stuff. We probably would have just wandered around and walked out without the conversation. We also enjoyed talking to her and the experience of shopping in her store, which would otherwise have been just another tourist shop.

So, again: Don't say, "Can I help?" Build rapport instead. Besides, it's also more fun.

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