Cashflow: Be Respectful
Most of my clients believe factoring is a god send remedying their constant lack of cash. Think about that – all my clients were profitable – but they were struggling. Profitability is measured with a P&L report – like many CEOs, I reviewed my company’s P&Ls weekly. However, your immediate financial wellbeing relies on good cash flow forecasting.
We are going to discuss financial reporting in another series but right now we need to discuss cash flow as a financial cornerstone of your company.
Like any credit facility, factoring comes at a cost. When it is needed for an absolute obligation like payroll, the cost of factoring is insignificant vs failure. But I encourage my clients to realize they are one of many small business owners within their credit sphere. And, they now have the power of prompt payment. And that ability adds value for their vendors and subcontractor relationships. Remember, all small businesses are affected by the tyranny of slow paying corporations.
Vendors favor their prompt payors. Your efficiency is dependent on the capacity of your vendors. AND, your ability to win the preference of your customers is impacted by your vendors and subcontractors performance on your behalf – nothing wins their loyalty like prompt payment.
As you factor invoices, look for ways you can offset the expense. Many material suppliers and subcontractors will provide a discount if the statement is paid within ten days. Let’s say you have a $10M Company and your gross cost of factoring is 2% and your COGS is 65% of which 60% is vendors. If ½ the vendors will accept a 2/10 payment, your net cost of factoring dropped 20% to 1.6%. That is a $40,000 savings. Additionally, for those vendors who will not accept the 2/10 offer but will accept a credit card (don’t ask me why) use the card to pay them the day after it closes for the month and use factoring to pay the card two days prior to the payment date. You should be able to save 1%+/- off the cost of factoring.
A good company accountant can save the company as much as her annual salary by organizing factoring and payment schedules. But she will be under demand by BDOs, division managers, and supervisors asking for early pay favors. It will be your job to run interference for her – and why not she is increasing YOUR profit.
Within this discussion all subject matter has pertained to cash flow and how good management of cash flow can increase profitability. If we go back to that $10M company for a moment – Let’s assume it generates a profit of 12.5% - that’s $1,250,000. You can be sure that $1.25M is not just laying around in cash. In fact, if this is your company, you’re probably asking – “Where the hell is it?” My guess it is hiding in receivables, new equipment, inventory, loss reserves and, oh yeah, taxes. Let’s be real here – if you are using factoring the cost is probably $150,000 – so now your net profit is $1,100,000. HOWEVER –
Your cash on hand at any given time is probably $200,000 greater with factoring as your partner. And that $200k is going to work wonders helping you to become a $12M company.
With the next series of discussions – we are going to examine good growth strategies – I hope to see you there – and remember if business is good but you have more checks than dollars – give us a call – we can help.
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