In this article Dr P Singh of Cash for Invoices Limited-the specialist invoice finance provider explains the importance of cash flow to company value.
Achieving this happy state is essentially knowing where to find cash and knowing how to increase it. There are many sources of cash, but skill is needed in knowing where they are, their relative suitability, and getting hold of the cash.
Once obtained, cash needs to be invested. There are many possible uses of the cash, but some will diminish it whereas others will increase it. Many people mistakenly choose the former instead of pursuing the latter. Choosing the right mix of products or the right business sector will increase cash, however the wrong products and sectors can diminish it
Cash invested might (probably will) diminish at times so its investment needs to be managed carefully so the end result is more cash not permanently less of it.
If cash levels are falling dangerously low, the management team should have in place contingencies. These are likely to include several sources of additional cash, a common one being a bank loan facility or an overdraft facility. Aside from banks, what else could a company raise its cash levels?
A common reason why cash levels decline is because of the cash conversion cycle. Many companies invest cash to make, market, and then sell its products. This process can take several months. Many sales are credit sales, meaning the buyer (debtor) is given an invoice and allowed up to several months to hand over cash for the purchase. The cash conversion cycle of initial outflow then inflow can create a significant cash gap.
This gap is normal however it needs careful management to avoid cash net balances falling below the level where the company becomes so financially distressed it is unable to recover and becomes insolvent.
It could borrow, but that would increase interest payable. The greater level of debt outstanding might make the company riskier and that might raise its cost of borrowing and so lower its value.
Another, though less commonly known, source of cash is for the company to factor its debts.
Conventional debt factoring is a useful alternative to borrowing more debt. It involves the sale of invoices (from credit sales) in exchange for immediate cash. To manage the risk the debtors will not pay for their purchases (credit risk), the factor will purchase invoices for around 80% of their value and pay the balance when the debtor pays, less the factor’s fee. The factor will usually also want a debenture over the company’s assets and possibly also directors’ personal guarantees.
Factoring fees can be of many types including arrangement, servicing, renewal, and credit protection fees. These inevitably raise the all-in cost of factoring for the company, but its benefit are immediate cashflow without adding to debt levels, and transfer of credit risk to the factor (though some factors transfer credit risk back to the company if the debtor defaults).
Single invoice finance
Cash for Invoices Limited offers single invoice finance (sometimes called spot factoring or selective invoice finance) – a type of debt factoring that has key advantages over conventional debt factoring and invoice finance:
Many businesses could benefit from single invoice finance from Cash for Invoices Limited. Its benefits are several:
Diversification – the credit crisis has shown that banks cannot be relied on to continue to supply necessary funding to businesses. Having a panel of alternatives can keep businesses funded when one becomes unavailable.
Cost – not requiring legal security, a facility, and paying a plethora of fees make single invoice finance cheaper than conventional debt funding
Speed – not having to deal with the legal complexities of arranging charges, arranging credit agreements, and undertaking extensive due diligence, means single invoice finance from Cash for Invoices Limited can be substantially quicker to get funds for a business
Simplicity – many of the complexities that can be off-putting but necessary to get funds from conventional sources including debt factoring can be avoided by single invoice finance from Cash for Invoices Limited. Even some single invoice finance providers require facilities so a business needs to be selective in its choice of single invoice finance provider.
Choice – unlike conventional funding and debt factoring, with single invoice finance from Cash for Invoices Limited, the business not the funder, decides chooses when it receives funding.
For a free no-obligation quote on selling an invoice visit Cash for Invoices Limited