How To Improve Working Capital Management For Your Business | Accounts Receivable Factoring And Financing
How To Improve Working Capital Management For Your Business | Accounts Receivable Factoring And Financing
Working Capital Management
If you’re running a business, properly managing your working capital is very important to your success. In fact, poor cash management has been the demise of otherwise perfectly viable businesses. But why is cash flow management so important? Well cash flow management (or working capital management) refers to the management of current (or short term) assets and current (also short term) liabilities in order to avoid major imbalances (and most importantly negative cash flow) that can lead to negative cash flow and literally cause the business to go under.
Few things can be more frustrating to a business owner than seeing their cash tied up, which hurts their ability to keep their business going smoothly. Whether your cash is tied up in inventories or prepaid expenses, it doesn’t matter: you need cash and you need it now. One of the best sources of cash is the clients you’ve sold to, but who have yet to pay you: your accounts receivable. Some operations, like a laundromat business hardly have to deal with such issues; but unfortunately, if your business does, keeping track of them and actually getting paid require a lot of attention, and you still have a business to run. One of the ways to improve working capital in your business is to make use of accounts receivable factoring companies and accounts receivable financing companies.
Accounts Receivable Factoring Companies
When those situations arise, you have the option of approaching an “Accounts Receivable Factoring Company”. What do those companies do? They simply purchase your outstanding accounts receivable (like your invoices) at a discount, meaning that they will not pay the full value of the invoices. The amount of the discount will depend on a few factors, the most important of which will be the age of the accounts receivable (how long have they been on your books), and the financial situation of the company that owes you the money.
As a rule, the higher the quality of your accounts receivable, the lower the discount you’ll have to accept. The factoring company pays you in cash and is now the owner of those accounts receivable, and collecting them is their responsibility. They make money by collecting the invoices at face value. As long as they collect more than they paid for, they’re in profit.
Accounts Receivable Financing Companies
Those companies handle their business a little differently than the factoring companies. They don’t actually purchase the invoices. They finance you by looking at your receivables and then issuing you a loan with your receivables as collateral. Just like the factoring companies, they will look at your receivables portfolio to decide on the amount of the loan and which receivables they will issue it against. Since your business still owns the receivables, the responsibility of collecting them still lies with you, not with the financing company.
In any case, you’ll have to pay fees for both types of financial services; but factoring companies charge higher fees than financing companies because the former also have to collect, while the financing companies don’t.
Leave a Reply