There are many types of businesses that rely on expedient cash flow to operate optimally. Whenever a company uses its capital to purchase goods for manufacturing a product, they will wait until the product has been shipped, accepted and paid for before they can utilize those funds again to buy more supplies. Usually the business can qualify for trade credit, but in this economy there is even more stress from suppliers to keep accounts current.
There is an industry standard for annual turns of capital – meaning the time it takes to purchase supplies, create a product and have it paid for. A company may rely on a number of turns of their capital during the year. Each turn translates into profit. If the company creates a product and sells it for a 20% gross profit, each time it turns the capital it makes an additional 20%.
What invoice factoring can do in these situations is increase the annual turns of capital in the company’s cash flow. If a company is currently experiencing 7 or 8 passes of their capital, by using a factoring company to gain immediate access to the funds tied up in an invoice, they may be able to increase their turn rate to 10 or 11 times annually. With a the additional profit derived from increased turns the benefit of factoring invoices outweighs the cost of the factoring. This sort of strategic thinking is critical to optimizing a company’s cash flow during a slow economy.