Discover How Factoring Invoices Can Improve Your Net Profit

Rebuilding your business after the recession will prove challenging for some not knowing how or where to find adequate working capital. It has been some time since business owners certainly had to be financially creative and search outside the traditional banking box. That being said, understand how factoring invoices will improve a companies net profit could be the ruling factor on who wins and who loses coming out of this economic downturn.

We ask all clients this question; if we could solve your cash flow problem what would you do with your company? In almost all cases, business owners and management teams respond by saying they would grow the business. If this is your case, and additional working capital will allow your company to grow then accounts receivable factoring could be just the ticket.

However, this funding vehicle is not for everyone. If your business model has changed and you now find yourself in a declining market facing reduced sales volume, invoice factoring could prove detrimental to the overall health of the company. That is, without the infusion of cash would provide sufficient working capital to regenerate sales growth either within the current customer base and / or by exploring new top line revenue increases within other markets.

Let me explain in the following example how a company can increase top line revenue growth and substantively improve net profits as a direct result of factoring invoices.

In this example we will assume a 3% factoring fee on only the increased sales volume. In this case factoring costs are based on \$ 2,000,000 (\$ 8,000,000 less \$ 6,000,000)

Without Factoring With Factoring Invoices

Sales \$ 6,000,000 \$ 8,000,000
Cost of Goods Sold 60% \$ 3.600,000 \$ 4,800,000

————————— ———————– ——
Gross Profit \$ 2,400,000 \$ 3,200,000

Overhead – Fixed \$ 1,500,000 \$ 1,600,000
Factoring Fees \$ —- 0 —- \$ 60,000

————————— ———————– ——
Net Profit \$ 900,000 \$ 1,540,000

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In this example, by implementing Invoice Factoring, the above company increased top line by \$ 2,000,000 annually which yielded an additional \$ 640,000 in net profit at a total cost of \$ 60,000. We show the cost of goods sold holding steady at 60%, where mostly the costs would come down due to volume discounts provided by the sellers.

In addition, for illustration purposes, fixed costs such as rent, insurance, telephone etc would only increase slightly and we are reflecting a 3% factoring charge on the increased sales volume. (ie \$ 2,000,000 times 3% equals \$ 60,000)

Furthermore, improving cash flow by freeing up working capital companies can expand knowing that they have the resources to pay vendors timely. In many cases, vendors will share in the cost of factoring by providing quick payment discounts.

This is a win, win, win scenario. Your customer will receive timely deliveries, the sellers also gets to grow and will often provide discounts to be paid timely. As a result, your business will flourish by growing top line revenue as well as generating substantial gains in net profit.

You may ask why would my company want to look into Invoice Factoring.

As outlined in a recent New York Times article small and midsized American businesses are struggling to secure adequate bank financing, then pushing back expansion plans and slowing overall economic growth.

In a recent survey of senior loan officers tied by the Federal Reserve Board, the cumulative consensus shows lending standards will remain tight until at least the middle of 2010. Lenders lack of confidence due to reduced viscosity and uncertainty in the market. Additionally, most banks and financial services companies have not really recovered from the lingering effects caused by the mortgage meltdown, declining real estate values ​​and the collapse of Lehman Brothers.

Another factor relating banks are potential losses mounting due to consumer credit card exposure as the unemployment rate increases and cardholders find themselves in trouble. Also on the horizon is a commercial real estate bubble due to business failures causing higher vacancy rates. Until the extent of these loses are known, bank will be inclined to hold onto their dollars.

In summary, banks are currently risk averse and are not going to lend any time soon. Finding and implementing a plan "B" could prove to be the difference for your business as the economy recovers.