Cash Flow: You Don't need AR Factoring.

Search the internet today, and one of the biggest problems facing businesses is managing cash flows. A business known as Accounts Receivable Factoring which has been around for quite some has recently shown signs of growth as businesses struggle with managing the flow of cash, which has been exaggerated by the credit markets where credit facilities are harder to get especially when you explain that you need it to help you with your cash flow problem. AR Factoring is the business world equivalent of Pay Day Loans, and on average it costs a whopping 2% to use these services. Factoring is where Company A gives their open invoices to the Factoring company for cash minus the 2%, and of course the other fees associated with the Factoring services. The Factoring companies will advertise the low rates of 1.95%, but don't forget that they are going to add a risk premium for your customers that have less than stellar credit history's. At the end of the day you walk away with about 98-92% of your cash, but you have cash to pay your bills and employees.
While factoring is a quick and easy way to fix a cash flow short fall, for many companies it is really treating the symptoms not the disease.

Step back and look at the Root Cause: Think of all of the steps in selling a product to you customer:
Day 1 Your customer places the order:
Day 4 You either manufacture it then or pull it from inventory, which mean that you need to make another one, CASH OUT.
Day 4 You ship the order to the customer. Cash Neutral
Day 8 You have to wait for the invoice to come back from the carrier.
Day 12 The carrier invoice has been audited if correct the Shipping and Product Invoice can be merged into a final document.
Day 15 The customer receives the Invoice, and it goes into audit.
Day 17 Audit complete, if the invoice is correct the the customer pays you in thirty days on terms.
Day 34 You pay for the freight. Cash Out.

Day 49 You finally receive payment for you product. In that time you have Paid for the making of the product and shipping the product, not to mention all of you other costs. This is assuming that the Invoice process went through without any problems which is not always the case.

Let's see what happens when you Partner with a 3PL that on average Pays you 2% to you Bottom line:

Day 1 Your customer places the order:
Day 4 You either manufacture it then or pull it from inventory, which mean that you need to make another one, CASH OUT.
Day 4 You ship the order to the customer. Cash Neutral
Day 5 The Shipment is billed an EDI is sent to the Auditors at the 3PL.
Day 5 The Freight Invoice is audited and put into General Ledger format which always you to automatically produce an invoice for your customer.
Day 5 The invoice is prepared and sent to the customer.
Day 7 The customer Receives the invoice, and since your bills are 100% correct your invoices fly through the auditing process. They will pay you in 30 days on terms.
Day 12 The freight is paid. Cash Out.
Day 37 You receive Payment for the product.

WOW!!! A 12 DAY Improvement Just from having more Control and Visibility to the Logistics portion of you Supply Chain.

Having a streamlined process for your logistics costs as it is tied to producing invoices for you customer can make a huge difference in you company's cash flow. Examples 1 and 2 while being examples are not far from the truth for many companies that I have encountered. Improving you cash flow by 12 days is a tremendous improvement, and can mean the difference of Factoring and order using credit and being able to cash flow your operation. This kind of cash flow control could be the difference maker for you company.