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• 22 Apr

  Factoring Payments To Increase Cash Flow

  

  Increase your cash flow, and money will flow more smoothly through your business, making it easier to pay your creditors on time.

  Increasing Cashflow

  There are really only three ways to increase your cashflow.

  1) Speed Up Payments To Your Business

  If your receivables are paid more quickly by your customers, it improves your working capital position. You have more money available. Let's say you have a sales ledger of £100,000 and that represents 2 months outstanding sales. That money is owed to your business, it is an asset, but it is not liquid. You cannot use that cash to pay your suppliers, staff and other expenses.

  So assuming 31 days in a month, that is 62 days sales outstanding, which is £1,612.90 per day (100,000 divided by 62 days). For every day that you reduce your sales ledger, you release an additional £1.6K into your business. If you can knock 10 days off your debt turn, you could free up an additional £16K of working capital. There is always a delicate balance to be struck between granting credit, and getting paid within a reasonable time.

  How can you do this? Well you might try improving your credit control processes, reducing the credit terms offered to debtors, or giving a discount if they pay more quickly.

  2) Slow Down Payments To Your Suppliers

  Be careful not to damage relationships or breach your contractual obligations, but is there a way to slow down your payments to your creditors? Let's say you are spending £25K per month on supplies. If you are paying all your suppliers on 30 day terms, and you can arrange 45 day payment terms, you have created an additional c. £12.5K of working capital within your company (assuming a 30 day month). 

  3) An Injection Of New Working Capital Into Your Business

  The other way to increase your working capital position is to have a new injection of working capital into your business. This could be in the form of further investment, additional share capital or new lending, e.g., via a bank overdraft, business loan or a similar product.  

  Factoring Payments To Increase Cash Flow

  You can also use factoring payments to increase cash flow. Debt factoring addresses point (1) above, it accelerates your debtor payments, yet it isn't borrowing - you are already owed the money from your customers, you just get access to part of it more quickly. You raise your invoices on credit terms, as usual, and the factoring company give you a prepayment against that receivable. This might be 85% on an invoice, with the balance (less the fee) passed to you when your customer pays. That sales ledger used in the example about, could create a cash injection of £85K. Factoring payments can significantly boost your working capital position. 

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  Related Information

  Read our other article which sets out 10 Ways To Boost Your Cash Flow.

  By Glenn Blackman