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Monthly Archives:April 2016

Managing Working Capital

Keys to Managing A Businesses Working Capital

For businesses small and large, managing working capital, primarily accounts receivable and inventory is critical for a business to be successful in managing its cash flow. Managing these working capital components can be both time consuming and frustrating. It can be very helpful if you factor your accounts receivable or secure an ABL facility. Factoring is basically selling your accounts receivable as they are generated essentially turning your sales on credit into cash sales. There is a discount, which if you have razor thin margins can be a bit pricey, otherwise factoring can be a life saver. This is particularly so if your customers don’t always pay you on time. An ABL credit facility can also be very helpful. ABL facilities essentially are a line of credit based on your accounts receivables and inventory, excluding work in progress. This also gets you cash much quicker than waiting on 1) Customers to pay you and 2) Converting your inventory into receivables through the sale of goods and services.

Many business that are technically profitable, even very profitable have gone out of business. How, you may be asking. Simply by not managing cash flow. What this results in is not having the cash to pay bills when they come due. Not having cash can snowball on a business and kill it. That’s why managing working capital is so critical. Staying on top of your accounts receivables and inventory will help minimize the problems a business encounters with its cash flow. As a business grows, hiring a full time employee or employees to do these tasks becomes a necessity versus a luxury. A business can also use a contractor who specializes in managing these assets, particularly accounts receivables. The only downside to contracting out the management of your accounts receivables is the fact that your contractor is in contact with your customers, the life blood of your business, so choose them carefully. Even then you want to monitor how they relate to your customers. Contracting out inventory management is much less risky and there are some very good logistics (the primary component of inventory management) companies. Many fortune 500  companies use logistics services companies to manage their inventory and most importantly, its movement. For you or a logistics services provider to manage inventory, you need good internal inventory management software. Most inventory depends heavily on sales forecasts so as the old adage says, ‘garbage in, garbage out’. So be sure your sales forecasters whether they be an administrative function or your sales force provides realistic sales forecasts.

So the bottom line is this. Make working capital management a high priority for your business, whether you have a new startup business or a business that’s been around a while but struggles with cash flow management. Utilize an ABL loan, factoring or whatever outsource management services you need to insure this is Taken care of. Your business will thank you with less management stress and more profits and cash in the bank. Good luck.

thebopster

What is Factoring

 What is Factoring (Accounts Receivable Finance)?

 

It is basically a transaction where a business sells its accounts receivable or invoices to a third party commercial company which is known as a factor. Factoring is done so that business can receive cash in a quicker time. It is also called accounts receivable financing which is similar to but different from an ABL loan. The benefit of factoring is that instead of waiting one or two months for the payment of a customer, you now have that much cash to control and lead your business effectively.

How does factoring take place?

  • Provide a service to your customer.
  • You send your invoice to a factoring company.
  • You receive the cash in advance on your invoice from the factoring company.
  • The company collects full payment from the customer.
  • The company then pays you the rest of your invoice amount minus a particular sum.

 

Benefits of factoring

  • It has no limit to the amount of financing.
  • Factoring is beneficial for start-up businesses that need cash immediately.
  • The financing does not show up as debt.
  • It can be customized so that it provides the required amount of money when the company is in need.
  • It is based on the customer’s credit quality.

Origin of factoring

The origin lies in overseas trade among nations. It started as a business in England first and then proceeded to America with the pilgrims in 1620. Factoring has evolved over years. It started in the United States for companies to get more cash as many companies faced difficulties getting a secured loan from the bank.

Who all does this factoring?

Companies of all sizes use factoring to increase their cash flow. Factoring is done by all industries like manufacturing and distribution, trucking, transportation, textiles, staffing agencies and oil and gas. Companies use this cash produced from factoring to buy new equipments, hire employees, pay for inventory and expand operations. It allows a company to take quick decisions and expand at a faster rate.

Banks have strict requirements in order to obtain a conventional loan. It may take a long time to take the decision as it depends on the business owner’s credit scores. Factoring helps you buy your eligible invoices at a discount and pay you the maximum of the total amount within hours of verification.

In invoice factoring there is no debt to repay and there is unlimited funding potential. It also has a faster rate of approval that is within 3 to 5 days. The approval is based on the credit strength of the client. Business startups are allowed factoring

On the other hand in bank loans the principal and interest is repaid over time and the funding potential is capped by banks. The approval may take a long time and based on company’s credit history. It is very tough for business startups to get a loan.

Conclusion

The terms of factoring vary from industries and financial service providers. Most factoring companies will purchase your invoices and will provide you money within 24 hours. The factor provides you back office support.

 

thebopster