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Factors in survival

8th November 1980
Page 64
Page 64, 8th November 1980 — Factors in survival
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Which of the following most accurately describes the problem?

NY small and not-so-small Jliers are now finding their -y existence in danger as they tipple with punitive interest es, unsympathetic bank maners and customers taking :ger and longer to hay.

n fact the road haulage indusis in the midst of a real mp, with an estimated 60,000 ries off the road through lack work and 7,000 hauliers driout of business this year. ;o there has been a general Ttening up in cash control :h companies shortening dit terms, improving collec1 procedures, and pushing der for outstanding bills to be tied.

:ut there is still a source of ds, most of which stems from large banks and merchant lks, which is available to cornroe and industry and deled to assist a company's h-flow situation — factoring. 'S a financial service and tool ch, if better known and apciated by management of ipanies with annual sales of -thing from E100,000 a year yards, could well mean the erence between liquidation A continued growth. Insingly, hauliers are taking e.

actoring works on the basic iciple of making a flow of ds available to a client for his ik debts. Normally a factor s its client 70 per cent of the due and the balance is paid e the factor has recovered full amount. Cash is thus imiiately available as soon as client has dispatched his his means the company sells Jelly for cash with no 80-day t. It is arguable that if more ipany managements had astigated the possibilities red by factoring, the liquion figures would have been ter than we have seen.

should also be clearly unAood that factoring is not a ling operation but is compleitary to banking.

has been aptly described as ,ay of "increasing the protivity of money" by freeing is from being locked up for iths on end in trade debts. has also been appropriately :3ribed as a management tool solving firms' liquidation, tor and sales accountancy )Iems, enabling top execu

to concentrate on the job they know best and like doing — producing and selling their company's goods or services.

The factor can make these services available because he handles the underlying asset on a continuing basis. In this way he gets the "feel" of the asset. The well-administered company will take advantage of the improved cashflow, and in the purchasing departments of many industries large savings can be made.

The first of these will be applica ble to most companies, namely the taking of discounts from suppliers for early settlements. Purchasing divisions of many organisations can make considerable savings by closely examining discounts offered, but often this can't be turned to advantage because sufficient funds are not available. Use of a factor overcomes this problem.

The resources of mediumand small-sized firms are limited, and the collection and salesledger departments with the ability to assess the credit worthiness of their customers are frequently inadequate. Priority has to be given to production and sales with the result that other areas can be and often are neglected.

Factoring is applicable to most companies who sell on a credit basis to other companies. Indeed, it places the user in a position similar to that of a cash retailer, a position which ensures that the customer is not utilising credit granted to it to finance its own business.

Factoring is of greatest value to the expanding company because it is this type of company that often faces the problems of overtrading during growth periods. Factoring enables a growing company making profits to trade at a higher level because the cash position is always kept under control.

What does factoring cost? The charge is divided into two parts. The factoring service charge will be a percentage of total sales. And the interest charge, applied only to the monies advanced, will be computed daily.

The interest charge will be comparable to that charged by a joint stock bank on an overdraft facility. The factoring service charge will be dependent upon the particular circumstances involved. Some of the considerations which we take into account will include the volume of work in relationship to the tocal annual turnover and other matters such as the number of customers accounts, invoices, UK credit sales and export sales.

The factoring charge will also reflect the amount of collection work. In addition to the work involved, the factor will assess the strength and spread of the client's customers, the percentage of the advance against the invoice, and the strength of the client.

The variances in workload and risk can be great. This is also the case with the factor's charges on turnover, These are normally in the range of 0.5 per cent to 3 per cent in extreme circumstances. The whole of the sales accountancy work will be undertaken by the factor for this charge which is often less than a normal cash discount.

It should be borne in mind that if the company had not factored they would probably have offered a cash discount in order to try to obtain their cash at an earlier date.

Most factors will consider an application from companies with annual sales in excess of £100,000. All factors will want to back only companies who can show that they will benefit through the use of factoring. They will also place a lot of importance on the ability of the management in production, selling and financial control.

It is certainly not in a factor's interest to inject money into a poorly managed company. But it is in his interest to back a growth-oriented company with sound management and products. Both benefit since the volume of monies advanced by the factor marches in step with the client's sales — unlike the restricted band overdraft geared to assets.

Purchasers are now aware that they must treat their small and medium-sized suppliers with the same respect that they would show major suppliers. But they also know that as a result of factoring the supplier will have the assured cashflow which will let them continue in production and provide the goods which are essential to them.

The benefits which accrue from using the services of a factor may be summarised: • Sales volumes potential increased • Profit increase with higher sales totals • Cash flow improved • Fund flow planning eased • Purchasing power enhanced • Discounts can be taken by using factor's funds • Bulk buying advantages through factoring finance • Settlement discount allowances can be avoided • Bad debt risk substantially reduced • Sales accounting and credit control overheads reduced by using computerised services.

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