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Factoring Accounts Receivable When Needing Cash
The key to any business is the ability to convert revenue into revenue. Calculating accounts receivable is an important part of success. Basically, this is a process where a good or service is provided and payment for it is not made at the time of service. As a result, the required balance becomes the receivable.
Properly managing this part of the books is important to maintain the cash flow of the business. Many businesses have turned to service methods to collect payments at the time of service delivery. This greatly reduces receivables and the risk of non-payment.
Service point systems require the customer to pay for the service in advance. In some cases, such as health care, the service area accepts partial payments. This is because many times the full cost or payment for services is not determined until after the patient has been treated or discharged. Selling is different because you can’t take something without paying for it first.
In retail settings, the service area is nothing new. In fact many companies have credit and debit card machines integrated into their cash register systems. This interface helps them accept electronic payments, personal and business checks for purchases.
Receivables management is usually entered into the factory and recorded by formula. This formula gives an indication of how A/R is collected over time. Days in A/R is a reflection of the ability to convert payables to cash. So if days to A/R is 35, that means that on average, it takes 35 days from the time the product or service was provided to the time it was paid for. The goal is for this number to be lower. The lower is the better sign that money is coming in the door.
Improve your Cash Flow with Invoice Factoring
Invoicing, that is, selling invoices to another company (something), can be a huge cash flow booster. There are many ways to earn money quickly when you are in business with accounts receivable, but quoting is one of the easiest ways. It is an invaluable tool for a future business with many benefits.
Selling accounts receivable is more desirable than a loan. First, it is easy because it does not require any credit history or collateral. Second, nothing can be repaid because the money already belongs to the company. The purchasing company will purchase the invoices designated to be collected from accounts receivable, so that they are receivables, less any fees or percentages taken from the transaction. It does not need to be paid because the invoices are for products or services already provided.
Not much work is required. A lot of paperwork is eliminated because companies don’t have to send first, second and final payment notices. Reports, too, are deleted. Money is given and the party is responsible for collecting the money.
Invoices often take thirty, sixty, and sometimes ninety days to pay. While those days add up, businesses can suffer and sometimes go down. Small and medium-sized companies are the most vulnerable to cash flow problems and a week can make a big difference in their decision (or need) to close their doors.
The money is available immediately. Instead of waiting for customers to pay their bills, companies can spend money on their business priorities including equipment, marketing services, and other valuable things to help grow the business. Waiting to buy these items is unnecessary when waiting for accounts receivable is eliminated.
Instant cash eliminates debt. By getting the money quickly, the debt can be eliminated quickly by paying less interest. Many companies choose to sell their accounts receivable, too, to avoid sending invoices to collections due to nonpayment. No business should suffer because a customer doesn’t want to pay for a product or service they already received.
Factoring can save a company money. While the company will lose some of its accounts receivable from fees, it can save that money through supplier discounts. Many vendors and suppliers will reduce bills by a percentage by paying on or before the due date. The easiest way to do this is through the improved cash flow that factoring allows.
There are many companies that offer invoicing, but research is key. Free quotes are available for almost all of them, so it’s important to shop around. Each will have different caveats to purchasing accounts receivable, including the amount they will purchase and their cutoff. Every company is in business to make money, so it’s important to remember whose business comes first!
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