At certain times in your business cycle, whether you are a start-up business or a well-established veteran, cash flow is critical. Whether times or tough, or business is booming, cash flow challenges can cause unwanted stress and limit your growth potential.
Everyone knows the magic equation for a financial success: spend less, make more. Or, limit your expenses and increase your income. There are a hundred tips for saving money, and perhaps even more for making it, but when it comes to cash flow, you can really make an impact by turning your focus to your accounting department. There are two key principles to follow. In accounts payable: Keep your cash. In accounts receivable: Get your income as soon as possible.
Keep your cash. When it comes to limiting expenses we must turn to accounts payable. There is absolutely no need to pay any bill before it's due. Do not pay it early, do not pay it late. It's so simple, it bears repeating: Pay your bills only when they are due. When in cash crunch, keep that money in your pocket as long as you can.
Get your income as soon as possible. The second half of the equationincrease your incomemay leave you thinking, easier said than done. Some might think a quick fix for cash would be to take out a loan. Unfortunately, not everyone has this option, nor is it always good business decision. Besides, if you get down to it, this is not really your income, just someone else's money. The focus should be on the income you currently are earning and how to collect it faster. Here we turn to the accounts receivable department.
Your existing receivables are really assets that possess cash value. Rather than simply waiting to get paid, there is an option to reap immediate benefits from outstanding invoices: accounts receivable factoring, or invoice factoring. You can sell your accounts receivable (one or all of your invoices) at a discount to a third party financial institution called a factor. You then immediately collect cash on that transaction. The factor is then is responsible for collecting on the invoice. (Eventually, they will collect the full amount.)
This is different than a bank loan in a few ways.
Factoring involves three parties (seller, buyer, and factor) instead of just two. Also, the factor is not providing a loan but is actually purchasing an asset. The most important distinction is this: in order for a bank to offer a loan to your business, you must have good credit; conversely, in order for a factor to buy an asset from you, they consider the credit-worthiness of the buyer, your customer (the person who owes you money). This is critical because it means that regardless of the credit standing of your business, factoring is an option for you to obtain cash.
Accounts receivable factoring is a perfect solution for anyone unwilling or unable to take out a loan. Arguably, it's an ideal solution for any business looking for immediate cash flow. A small start-up company with not enough credit is constantly in need of cash for growth and expansion. An established firm may need a little boost to get through a tough time, or because they too are expanding.
When cash flow is critical, turn your attention to the accounting department to provide the solution. Spend less by holding on to your existing cash as long as you can, and make more with invoice factoring services. The combination of the two will result in cash flow freedom for your business.