How Factoring Can Increase Profits

Can factoring help your business be more profitable?

Look at this simplified statement of a manufacturing company. We know that the main reason people factor is to grow their business. In this example the company starts with $100,000 worth of invoices and through factoring they end up doubling their volume.

We are using a factoring fee of 4% for 30 days. (Fees vary and can be as low as 2% depending on each individual client.)

While the variable expenses increased to go along with the added volume, the fixed expenses remained the same: these include such things as rent and utilities that will change little or not at all as a result of increased business

	Before Factoring	With Factoring
Gross Revenues	$100,000	$200,000
Cost of Goods Sold	60,000	120,000
Gross Profits	40,000	80,000
Less:
Variable Expenses	15,000	30,000
Fixed Expenses	20,000	20,000
Overhead	35,000	50,000
Cost of Factoring	0	8,000
Total Expenses	35,000	58,000
Net Profit	5,000	22,000
Summary
Net Profit After Factoring		22,000
Net Profit Before Factoring		5,000
Additional Profit From Factoring		17,000

As you can see, even with the additional cost of factoring, because of the significant increase in sales and the maintenance of the fixed costs, the bottom line has significantly improved. Factoring has just paid for itself and made a big difference in profitability.

Not every business will receive this kind of improvement. You need to assess your own company and make some projections and determine if having an unlimited supply of cash on hand could enhance your company’s bottom line.

If turning your accounts receivables into immediate cash makes sense, then can you afford not to factor?

Give LDG Business Funding a call to see if we can help make your company more profitable.