FACTORING EXAMPLE

ABC Manufacturing Corp. Condensed Income Statement (Without Factoring)

ABC Manufacturing Corporation currently produces $500,000 a year in sales. The business makes a 30% margin on sales. In other words, if sales are $500,000 he can expect to make a gross profit of $150,000 a year. However, sales are limited by the amount of money the business has available to buy materials and pay employees.

In this example, due to cash flow restrictions, ABC Manufacturing Corporation is constrained to sales of $500,000 a year. As a result, until ABC can accumulate more working capital, it can only make $150,000 a year. With factoring of account receivables, ABC’s business would not have a cash flow restriction.

ABC Manufacturing Corp. Condensed Income Statement (Without Factoring)

In this example, sales at ABC Manufacturing Corporation are no longer limited by cash flow problems. ABC can market its business without the worry of covering production costs, paying vendors or employees. ABC can now collect cash as soon as it produces, delivers and bills for its product. As a result, it can increase sales, take prompt payment discounts from vendors for materials (as much as 6%), and focus on generating new business by focusing on marketing and production instead of collecting due debt. ABC Manufacturing Corporation can increase sales to $1,000,000 a year. ABC sells its invoices at an average factoring discount of 5%. (This average fee is probably high, but will be good for our example.) Now that ABC is factoring, let’s take a look at the income statement for ABC Manufacturing Corporation.

In this second example, factoring has eliminated ABC’s cash flow restrictions. As result, ABC is able to double sales to $1,000,000 a year and take a 4% prompt payment discount from his vendors. Profits change from $150,000 to $264,000 a year. This means that ABC Manufacturing Corporation makes an addition $114,000 a year (a 76% increase). Over three years, ABC would make an additional $342,000. That’s real money!

Best of all, invoice factoring is a completely cash-flow sensitive solution to help your business grow.