By Mark Lomas
A business can be profitable and still go under due to poor cash
flows. What a profound statement. Even though your business is
showing a profit it can be difficult to pay suppliers and make
payroll on time. This difficulty is typically caused by a delay or
fluctuation in revenues. Cash flow shortages are usually caused
by slower paying customers, seasonal sales, or your company
suddenly experiences growth. (continued below ...)
A business can be profitable and still go under due to poor cash
flows. What a profound statement. Even though your business is
showing a profit it can be difficult to pay suppliers and make
payroll on time. This difficulty is typically caused by a delay or
fluctuation in revenues. Cash flow shortages are usually caused
by slower paying customers, seasonal sales, or your company
suddenly experiences growth. (continued below ...)
When customers do not pay with cash on delivery (COD) a gap is
created between the receiving of the revenues and the payment of a
profit of $20K. The $80K in expenses needs to be paid right away
but your customer does not pay for 30 days. This creates a gap in
cash flows. You need to pay out $80K before you see the $100K in
revenue. You are profitable but do not have the cash on hand to pay
your bills. This is why profitable companies can still go under.
When your company experiences growth this gap in cash becomes
far more difficult to manage because your costs are increasing
faster then the revenues coming in.
Good management and planning for this shortage in cash flow is
vital to your company's success. At a minimum, a one-year cash
flow analysis needs to be completed and reviewed on a monthly
basis. The gaps in cash flow must be identified with a plan to
overcome these gaps. The ideal situation would be for a company
to keep a cash reserve to draw against when a cash flow gap is
created. Unfortunately this is not a viable option for many
companies. Some businesses have the luxury of a generous line of
credit with a bank to overcome these cash shortages. In today's
tough lending environment these generous line of credits are
difficult to come by. Although this situation sounds grim there is
another viable alternative called Accounts Receivable Funding.
Accounts Receivable Funding or Factoring is a type of financing that
is tied directly to your accounts receivables. Qualifying for factoring
is much easier than traditional bank financing. A bank will focus on
your company's financial history and cash flow while a factor will
focus on the creditworthiness of your customers. This is because a
factor ties financing directly to your accounts receivable or invoices.
These invoices are a "promise to pay" from your customer. If you
customer has good credit then a factor is happy to lend you money
against it.
Factoring invoices is an excellent financial tool to help maintain
proper cash flow in your organization. When you sell your product or
service a factor will generally advance you in cash up to 90% of the
value of the invoice. Now you have closed the cash flow gap and are
able to meet payroll, pay expenses and pay suppliers on time.
When your customer finally pays the invoice the remaining amount
of the invoice will be forwarded to you minus a fee. As your
organization grows, so does your funding.
There is a cost for this type of financing so you need to carefully
weigh the reduction in profit to the benefit of being able to make
your payments on time. You need to also include the benefit of the
redirection of your time. Instead of trying to juggle customer
payments with paying bills you can concentrate on running and
growing your business.
If you investigate this type of financing, don't forget to shop around.
Fees for factoring can range significantly. To see how factoring can
help your organization we provide a cash flow calculator on our
website. Simply model your company's current cash flow situation,
add the cost of factoring to your cost of goods, lower your collection
days and watch how your cash flow improves.
http://www.spotlightfinancial.biz/Factor_Invoice.php
created between the receiving of the revenues and the payment of a
profit of $20K. The $80K in expenses needs to be paid right away
but your customer does not pay for 30 days. This creates a gap in
cash flows. You need to pay out $80K before you see the $100K in
revenue. You are profitable but do not have the cash on hand to pay
your bills. This is why profitable companies can still go under.
When your company experiences growth this gap in cash becomes
far more difficult to manage because your costs are increasing
faster then the revenues coming in.
Good management and planning for this shortage in cash flow is
vital to your company's success. At a minimum, a one-year cash
flow analysis needs to be completed and reviewed on a monthly
basis. The gaps in cash flow must be identified with a plan to
overcome these gaps. The ideal situation would be for a company
to keep a cash reserve to draw against when a cash flow gap is
created. Unfortunately this is not a viable option for many
companies. Some businesses have the luxury of a generous line of
credit with a bank to overcome these cash shortages. In today's
tough lending environment these generous line of credits are
difficult to come by. Although this situation sounds grim there is
another viable alternative called Accounts Receivable Funding.
Accounts Receivable Funding or Factoring is a type of financing that
is tied directly to your accounts receivables. Qualifying for factoring
is much easier than traditional bank financing. A bank will focus on
your company's financial history and cash flow while a factor will
focus on the creditworthiness of your customers. This is because a
factor ties financing directly to your accounts receivable or invoices.
These invoices are a "promise to pay" from your customer. If you
customer has good credit then a factor is happy to lend you money
against it.
Factoring invoices is an excellent financial tool to help maintain
proper cash flow in your organization. When you sell your product or
service a factor will generally advance you in cash up to 90% of the
value of the invoice. Now you have closed the cash flow gap and are
able to meet payroll, pay expenses and pay suppliers on time.
When your customer finally pays the invoice the remaining amount
of the invoice will be forwarded to you minus a fee. As your
organization grows, so does your funding.
There is a cost for this type of financing so you need to carefully
weigh the reduction in profit to the benefit of being able to make
your payments on time. You need to also include the benefit of the
redirection of your time. Instead of trying to juggle customer
payments with paying bills you can concentrate on running and
growing your business.
If you investigate this type of financing, don't forget to shop around.
Fees for factoring can range significantly. To see how factoring can
help your organization we provide a cash flow calculator on our
website. Simply model your company's current cash flow situation,
add the cost of factoring to your cost of goods, lower your collection
days and watch how your cash flow improves.
http://www.spotlightfinancial.biz/Factor_Invoice.php
| Managing Cash Flows is Vital to Your Company's Success |
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