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.