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How To Improve Your Cash Flow Forecast With Factoring

Cash flow forecasting is good business practice for any business. For an example of a blank cash flow forecast spreadsheet follow this link.

The cash flow forecast is divided into periods of time and shows the flow of cash through a business, what it starts the month with, what it receives, what it pays out and the balance of cash left at the end of the month. Normally the period will be months but where cash is tight a business may forecast its cash flow on a weekly or even daily basis.

The key issue that factoring addresses is that businesses tend to sell on credit terms to each other. That means that if you raise an invoice today it will typically be on 30 days payment terms.  That means that it will be 30 days from today's date until that invoice is due for payment.

The reality is that the time taken to pay that invoice can be much longer, maybe 60 or even 90 days. There may be 101 different reasons for this but as examples, in some cases, the customer may only pay invoices at the end of each month which means that an invoice received mid-month may only be paid at the end of the following month. In addition, businesses often stretch out their payments to suppliers, beyond their payment terms, in order to fund their own businesses. Put simply, if they don't pay your invoice they don't have to borrow the money from their bank in order to pay your invoice!

Get a quote for finance to bridge that funding gap.

Below is an example of how delayed payment of invoices can affect the cash flow forecast of a small business:

You can see that the business does not receive any cash from invoices being paid by debtors until Month 4.

Despite the lack of payment of your invoices the product still has to be purchased and delivered to the customer. Even if you are able to get credit terms from your suppliers it is unlikely that they will be long enough to account for the extended time that customers may take to pay you. Similarly, all your business expenses and bills still fall due each month and you need cash to pay them despite not having been paid by your customers. This creates a cash flow gap - the gap between the time that you have to pay your expenses and bills and the time that you get payment from your customers for the goods or services that you provide.

The cash flow forecast below shows how the expenses of the business fall due from Month 1 onwards but because of the delays in being paid by debtors, the business has a negative cash position throughout the forecast that will need to be funded from somewhere:

One solution is factoring bridges that cash flow gap, as soon as you raise your invoices a copy goes to the factoring company who then provide you with 85% (sometimes more) of their value immediately - often called advances or prepayments. That 85% means that you have the bulk of the money immediately, certainly enough to pay your expenses and bills within a business that has even the most reasonable of profit margins.

This cash flow forecast shows the same business but you will see that from Month 1 they receive 85% of the value of the invoices that they raise immediately:

NB Factoring charges are not shown in these examples but should be added to your forecast.

That 85% is then repaid to the factoring company when the customer finally gets around to paying and the remaining 15% then becomes available to you from that payment (less the charges that the factoring company makes).

The above cash flow forecast also shows the effect of that balance of funds being passed onto the business, after the customers pay, in month 4.

So by using forms of invoice finance such as factoring a business that could not afford to fund its cash flow gap is able to adequately provide enough cash to pay its business expenses as soon as it starts trading.