Accounts receivables are great unless you need working capital … now.
And that’s when I love the response when someone asks me about the cost of factoring … but gives little or no thought to the value added benefits of it.
Actually? I don’t love it because making good business decisions is – or should be – a process of comparisons with the question being: Which avenue leads my business to the most profits with the least amount of risk and the least amount of liability? End …
That said: If you added a compenent or complimentary service to your existing products or services that would add 10 – 20 – 100% to your sales and increase your profit margins by those or double those numbers BUT would only increase your variable costs 2 – 5% would you use that component or add that complementary service?how to factor
When I ask this question guess what most business owners and advisors respond with? “I’d have to be insane not to do that … “ So tell me something, before the men with the white coats arrive: If factoring will provide the benefits above … Why are we so fixated on it “costing too much?”
The answer is easy and so I’m told it goes back to the 15th Century when children were indoctrinated to be good servants of the Czars and Royalties of Europe.
That teaching process carries over to our thought process about financing: We’re entitled to borrow cheap money …. and you should never look at money as a component of manufacturing even if it means that it doubles or triples your sales and your profits! Right?
That said: When isn’t the cost of factoring your receivables too high?
My rule of thumb is that this number comes into effect when the cost of the money exceeds the percentage of your budget that your fixed costs take. And remember … this is just a rule of thumb.
The reason I say this is that so long as the contribution to margin i.e. the net benefit to the profit margin is going to grow with increased sales then the cost of the money is irrelevant not withstanding that we want to get that money for the lowest cost … unless of course we are turning away sales, disappointing customers, or ruining our credit by not paying our bills in a timely manner.
From here the question becomes when and how long does it take us to get the money to finance our business?
If you think that I don’t meet people every day that are not completing sales because they are ‘searching’ for low cost money you’re kidding yourself. My question? Why not fill the sales using my money and take a slightly reduced profit but build customer rapport and brand your product … and too: Search for your cheap money.
Consider this: Isn’t it easier to access cheaper money when you can show successful sales fulfillment and profits than going on the premise “If you lend me the money now my customers will buy my product later!”? I know one thing: The bank is not apt to swallow this line … not in today’s market!
In closing, whether it’s this question or something else: Remember to do a comparison of the costs, the benefits, and the risks … but only if you want to stay in business!