- 06 Jul
I posted a while back about comments being posted on a Facebook advert for Crowdfunding, these have continued to appear, following exactly the same pattern - a belief that businesses turning over £100,000 per annum don't need to borrow anything! This is so far from the truth - looking at an example in detail:
1) If a business has £100K pa turnover, it invoices £8,333 per month. On average terms of 30 days credit, that could take 60 days to get paid.
2) If we take a manufacturing business as an example, it will have to manufacture the goods prior to being able to even raise the monthly invoices.
3) if we assume an average gross profit margin of 50%, that means they will need to lay out £4,166 to cover the cost of raw materials prior to raising the invoices.
4) In addition, there will be the other expenditures required each month such as rent, electricity, staff costs etc. As with anything, the timing of the payment of these costs is not guaranteed to fall in line with the timing of payments received from customers. The net profit margin of the business, after these costs could be as little as 5 - 15%.
5) Even at 15% net profit, and ignoring all the other timing, growth and investment issues, the business needs 85% of its monthly income, just over £7K, available to meet its monthly costs and expenditure - it would take nearly 6 months to save that up from the net profit - or 17 months with a 5% net profit margin.
6) If the business is also growing, that will further exasperate the cash flow issues. Put simply, if the business were to increase its turnover by 25% during the month it would have to fund raw materials and other related expenses that were 25% higher than its turnover would suggest.
So a turnover of £100K pa really is no assurance of the liquidity of a business and it is highly likely that a business of that size will either need investment capital or funding from some source in order to cover its monthly cash flow requirements. This is where factoring and invoice discounting can be very helpful as they release the majority of the cash that is tied up in the unpaid invoices of a business. That cash can be used for paying suppliers for raw materials and expenses.