Factoring and Invoice Discounting Solutions and Strategies
Understanding Business Cash Flow
The term ' cash flow ' is widely used and somewhat widely misinterpreted. Its a specialized term in business and has often confusing definitions. The most pure form is the cash flow statement for any firm. At its simplest its a ' cash in' and ' cash out' analysis. Key to this analysis though is the timing of the receipt of funds. Any good business cash flow statement or projection will show projected inflows and outflows over a period of time - usually annually.
We mentioned wide misinterpretation. That is because it is often confused with other accounting terms such as 'profits ', ' income ', and 'revenue'. Naturally real cash is the life blood of an business. We don't pay our bills with ' revenue'!.
So, yes, our firm makes things, we sell them, and eventually we receive payment. During that time we are paying out cash to employees, suppliers, and also waiting to get paid ourselves. We are only able to pay our bills as a business with real cash!
When businesses prepare a cash flow statement they list their monthly expenses, both fixed and estimated, and then focus on anticipating when customers will pay invoices, thereby generating cash. Naturally there has to be some solid work around any assumptions in that whole process - for example:
Are the projected sales going to be realized
Will the payments from those sales be made on time
How much can be drawn out of the business in the meantime
As most business owners who have borrowed already know this type of document is probably the most important one that the bank or finance company wants to see.
Business owners therefore need to properly understand the total ' cash flow cyccle ' That cycle consists of purchasing inventory, booking receivables around the sales that are made, and then collecting hose receivables. Simply right? Not really, the true challenge is in the following: ' TIMING'!
Many textbooks in finance have been written around the mis-timing of the cash flow cycle - where large and once great companies went bankrupt by misunderstanding the subject of our article.
Most lay people find it very difficult to comprehend that a company that is profitable can go bankrupt. As we have discovered that can absolutely happen as financial managers confuse profits from a sale from receipt of cash from a sale. If the cash pipe is ' blocked ' problems will occur!
In summary, any business owners or financial managers understanding of the business cycle and proper cash flow will add value to the success of the business from a financial perspective.
Does your business have significant accounts receivable outstanding?
Does your business need capital to grow to help you expand or take your business to the next level?
If the answer to those two questions is yes, then we can help you factor your accounts receivable to generate the capitol you need to grow quickly! We are the solution for Toronto Ontario factoring, and our personalized attention to detail and our customer orientated approach will help your company navigate the pitfalls of factoring your accounts receivable and generating that extra capital you need.
Get the factoring experts working in your corner! We’ll work with you to understand your business and its unique needs. Once we have an understanding of how your business works, we can help you achieve the best Toronto Ontario factoring possible.
7 Park Avenue Financial has based its business on building relationships with customers, because it is our firm belief that only through personalized customer service can we meet your specific and unique financing needs. We have extensive experience factoring in Toronto Ontario, and we can help match you with the right buyer for your accounts receivable.
What are you waiting for? The solution to your company’s financing needs is just a phone call away, so contact us today!
Phone: 905 829 2653
Email: sprokop@7parkavenuefinancial.com
Toronto Ontario Factoring
Understanding the True Cost of Factoring and Invoice Discounting For Canadian Firms- By Stan Prokop - 7 Park Avenue Financial
Most business owners understand that their largest working capital assets are accounts receivable, often follow by inventory. ( On occasion inventory might be larger - that is not the norm)
If the largest working capital asset ( and the much needed cash!) is tied up in accounts receivable then does it make sense for customers to utilize factoring and invoice discounting, despite their concerns ( and perceptions ) around cost of using this method of financing. A rought estimate of payment terms in business might be that probably 90% of the worlds firms run on 30 day payment terms. Most business owners will quickly respond that while the worlds terms are 30 days, most customers pay in 45-60 days, and, unfortunately, sometimes longer!
Business owners need and want to convert those receivables into cash. When business owners hold receivables for 60 days this becomes a more costly scenario than they think. This is one of our main points around customers perception and lack of knowledge of the true cost of carrying receivables versus converting them into cash utilizing a factoring or receivable discounting facility. We will take a look a solid example of reality and perception of reality!
Let us say that a company has a 30 day payment terms. Let us also assume that they generate a 20% overall return on equity on their business model. Finally, lets say that the customer pays in 44 days. ( Not the 30 they promised!)
$100 x 1.20 44/365 = 100$ x 1.02 = 102.22
Therefore the company can earn a 2.2 % return on the funds in those 44 days. ( Example courtesy of Standard & Poors )
If a company factors or discounts their receivables at the time those invoices are generated then they have the true ability to immediately reduce the overall period that it takes a dollar to flow through their company. The new working capital / cash can be used to expand operations, buy more inventory, etc. If a customer is charged a discount rate of 2% / month on the factoring any new financial statement will show that days sales outstanding have reduced significantly.
The most important point in our example is as follows: The longer a business owner waits to convert receivables the lower the overall return on equity is for the firm.
Business owners and financial managers are strongly urged to investigate a Wall Street term, or ratio, known as the DUPONT FORMULA. While the analysis of that formula is not the subject of our article the business owner will see that the formula is an incredibly great way to see how asset size and asset turnover impact RETURN ON EQUITY. We would quickly note that Return on Equity is one of the strongest measures Warren Buffett uses to measure financial success. The essence of the formula is simply that if a company can turn assets more efficiently then return on assets and equity increases.
In summary we have shown that while customers many times focus only the factoring rate or price, this type of analysis is very short sighted, as the ability of a firm to utilize factoring or invoice discounting great enhances their overall asset turnover and return on equity. Factoring/Invoice Discounting reduces a company's collection period, allowing the company to finance growth.
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