AR (A/R) Finance is one method that Canadian business owners use to ensure they have the optimum level of accounts receivable and cash flow.
It doesn’t take long for Canadian business to realize that their receivables are in effect their funds that are sitting in someone elses bank. And trust us that the large corporations figured that out a long time ago – they invest thousands and millions of dollars in credit and collection departments. We know, we’ve sat there!
So how in fact does a firm extend credit in Canada, while at the same time minimizing the effect on working capital on a daily basis?
One of the things you have to do in advance is to calculate your firms ‘ collection period. If you monitor this over time you will find that you have a strong sense
Once you truly understand this calculation you will be in a position to understand the effects of increasing sales, taking on larger clients or projects, and knowing at the same time what it will cost you in financing costs and yes, even bad debt, as not all clients pay as we have found!
Most busines owners, particularly those in the SME sector don’t often feel they have the tools or knowledge or expertise to calculate these types of ‘ what if ‘ scenarios. If thats the case a business advisor, accountant, etc can help you for minimal or no cost. It’s all about putting the variables on the table and looking at them – they include things such as your projected increase in sales, your costs to deliver that product or service, the cost of financing expenses from your bank or financing company, and the cash flow that will come out of those increased sales .
How then cans Canadian business utilize receivable financing, also called ‘ factor funding’ to ensure they are masters in their kingdom – you know the kingdom we’re referring to, it’s the one where cash is king!
AR Finance simply accelerates the flow of money in and out of Canadian business. In a perfect world you are accelerating ‘ cash in ‘ and slowing down ‘ cash out , i.e. payables, etc.
The cost of factor funding, aka receivable finance is a very misunderstood topic in Canada. A good start might be for you to calculate how much it costs you now to carry receivables. Its actually only three data points in your business – you annual sales, your a/r , and the amount you are paying your bank or financing company to carry that bank line or commercial receivables line of credit.
Lets use a larger firm as an example – say it has 20 Million in sales, and they collect their money in 65 days. Let’s say they are borrowing at the bank at 5%. Their total financing costs are 20M X 5% divided by 365 days in the year Times 65 days which is their collection period. Their cost to carry A/R is then 178,000.00.
The cost to finance this a/r via factoring would be about 10k more a month , but the firm now has unlimited access to cash flow and working capital, is growing sales, and have maintained their ‘ cash is king ‘ status with strong cash on hand .
Is that good or bad, and how does it compare with factor costs. The key point here is that your DSO in effect becomes zero when it comes to receivable finance, as you generate cash immediately as you invoice. You then utilize that cash to generate more sales, turnover working capital faster, etc.
In Canada, as a general rule receivables are financed at a discount of 2% on a monthly basis. So you as a business owner have to take the time to re-do our calcs and determine your new cost of financing. You may be well surprised!
Speak to a trusted, credible and experienced Canadian business financing advisor on how factor funding and receivable financing works, what type of facility works best (its confidential A/R finance) and how your firm can qualify immediately.