In today's credit linked business environment, Accounts receivable is very relevant & efficiency can be much better harnessed and at a much lower cost. With the offshore service provider taking care of this aspect, the small business has more time and flexibility to attend to other core business areas like procuring orders, improving service delivery and mobilizing resources. Accounts receivable outsourcing is thus a trend among small business today.
Accounts Receivable Outsourcing - Advantage
By outsourcing accounts receivable, small business can avail a less expensive - and often higher quality solution and achieve significantly higher collection efficiency, thereby improving liquidity and company bottom lines.
By accounts receivable outsourcing, companies gain access to top notch collection agency professionals and advanced collection agency resources even if they don't have full time AR management needs. It doesn't take a long roster of past due clients to make a big dent in a company's bottom line. According to statistics, once an account becomes 90 days overdue, your business is likely to receive only 73 cents for every dollar owed. After 6 months, the amount drops to 50 cents on every dollar and down to 25 cents after one year. Bringing a collection agency on to handle accounts receivable addresses delinquent accounts within the first 90 days, before they get out of hand.
Accounts Receivables Matters really
Sales that have not yet been collected as cash reflect Accounts Receivable. In today's credit based business environment, small businesses sell their merchandise or services in exchange for a customer's promise to pay at a certain time in the future. Timely collection of accounts receivables is an extremely important source of cash inflows. If this management is bad, small business may not have sufficient liquidity to meet its own expenses. Moreover, accounts receivable portfolios can amount to 21 percent to 34 percent of a small business company's assets. Inefficient collection can amount to 25% of the asset base of a small business could put the very existence of the business at stake.
For a small business, like any other enterprise, accounts receivable also represent an investment. The money locked up in accounts receivable is not available for meeting the costs of running or expanding the business. The return from an investment in accounts receivable doesn't occur until the customers clear their invoices.
Day-to-day management of accounts receivables is traditionally paper intensive, time consuming and expensive. Invoices, payments, purchase orders, and statements are often received via mail, fax, or email. It is always not feasible for small business operators to implement Enterprise Resource Planning (ERP) and Line of Business (LOB) applications for data management because of high investment cost. Even if they manage the cost, capturing information from hardcopy documents, routing them to concerned individuals, and providing easy access to the documents in a timely fashion is indeed a very complex task for small business involving deployment of skilled manpower and enabling systems. Ultimately, management and collection costs of accounts receivables far outweigh the collection putting the small businesses in financial jeopardy.
Efficient Accounts Receivable management is thus a key task for a small business enterprise.
AR Outsourcing - Small Business Advantage
Small business operates with less manpower and do not have the ability to deploy highly expensive credit recovery mechanisms in their own country. Partnering with an accounts receivable outsourcing firm has many benefits. These benefits include, but are not limited to, increased cash flow; reduced operating costs; better small business accounts receivable control; efficient management of small business balance sheet accounts, increased sales to slow paying accounts; fewer delinquencies resulting in lower collection costs; and improved customer service. According to IDC review, outsourcing business processes from US is expected grow with a compound annual growth rate of 7.1 percent through 2009, when the market is expected to reach $355 billion. Of the total spending on account of outsourcing, small and medium businesses would have a share of 29% by 2009.
Accounts receivable outsourcing for small business is a trend that has come to stay. By leveraging dedicated and skilled manpower backed with high-end cross cutting technology, small business units can drastically turnaround locked cash to instant liquidity at a minimum process cost and utilize the resource to accelerate growth and higher returns.
Definition Of Accounts Receivable
As a small business owner, you will encounter the need for capital at various points in your business development. Understanding financial options available is a crucial business step to take, as the primary cause for small business failure is under capitalization. While you may not be having a cash crisis, you may simply be seeking the money to expand your business. If you are unable to turn to traditional financing, accounts receivable financing may be a sound option for you to consider.
What is Accounts Receivable Financing?
In its simplest terms, accounts receivable factoring is the selling of your outstanding receivables at a discount to a factoring company. Accounts receivable financing is also known as accounts receivable factoring or accounts receivable funding. In this transaction, the factoring company pays you a percentage of the accounts receivable up front, typically 75-80% of the total, with the remainder to be paid once the invoice has been paid. The factoring company will charge you a nominal fee for the transaction, but will handle the collections of your accounts receivables that you have sold to them. The fee that you will be charged will be based upon the factoring company that you select, the amount of the invoices that you sell and the duration of time that it takes for the invoice to be paid. Typically, the shorter the time it takes to have the invoice paid, the smaller the factoring fee. So, for companies that have clients who quickly pay their invoices, the fee could be as small as 1%.
The process of accounts receivable financing is quite simple. Your business will sell your accounts receivable, either all or a portion, to a factoring company in return for a discounted rate. The factoring company will generally wire you the funds the same day or the next day once they have received their proper paperwork, and then they will handle the collections of the invoices. Once the invoices have been paid, the remainder of the invoice, minus any applicable fees will be paid to your company directly. Most factoring companies will provide you with a consolidated monthly statement so that you can review the transactions and for your company's record keeping.
Benefits of Accounts Receivable Financing
Pass off Collections: Outsourcing your accounts receivable management to another company can free up your previously dedicated accounts receivable resources to focus on other more productive activities such as selling. Once you sell your accounts receivables, the factoring company manages collection of the payment.
Free up Working Capital: Most small businesses have a need for additional working capital, yet have their assets tied up and are unable to qualify for additional financing. Accounts receivable factoring can provide your company with cash as quick as the same day for invoices submitted. This cash can then be used for your customary business expenses, to meet payroll or for business expansion needs.
Quick Financing: Accounts receivable factoring will not require a business plan, long applications, credit checks, tax statements or other financial information. Accounts receivable factoring is not considered to be a loan, so there is much less qualification work involved to establish a relationship with a factoring company. Also, the approval process can generally only take a few days instead of a few weeks when compared to traditional financing.
Assistance with Slow Paying Customers: One of the challenges that many small businesses face when trying to grow is that many of the larger customers that they are looking to partner with have slow paying accounts receivable policies. For example, many larger retailers have a standard payment policy of 90-120 days. If it requires a substantial amount of capital to fulfill their product orders, your small business could be placed in a cash crunch simply by accepting a great new, large retail customer. Accounts receivable factoring allows you to sell this invoice for a discount in order to capture the capital that you had to spend in order to fulfill the order.
Selecting Factoring: Many factoring companies will allow you to pick and choose which invoices you send to them to factor. This can mean a substantial cost savings to your business and will allow you to factor only the larger invoices, or the ones that you know in advance are going to be paid in the mid term, giving you the cash that you need and helping to justify the fees associated with factoring.
Once you are ready to consider factoring as an option for your accounts receivable, ask the following questions of the companies that you are interviewing:
* Is the money needed necessary for your company's survival? Or, are you looking to take advantage of a business opportunity?
* How does this financing strategy match with your business plan? If you so not already have an established business plan in place, put one together prior to seeking factoring financing. Having a solid business plan will help you to make choices for your business that are in alignment with all of your business purposes and goals.
* Is your business in need of expansion capital? Have you explored other more traditional methods of financing?
* Have you reviewed the real cost of factoring your accounts receivable? For example, what percentage of your current repeating customers pay on time, how many pay late and do you traditionally have any issues with customers who don't pay?
* Have you researched multiple factoring companies to determine their rates and services before selecting one?
Getting financing can often mean the difference between a company closing its doors and staying open.
While it can do more than just prevent bankruptcy, many business owners are not aware of the process or its benefits. Spend the necessary time to investigate the companies you are working with, inspect the contracts prior to signing, and work to negotiate discounted rates for your business.
Both Mani Malarvannan & Thomas Mccarthy are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Mani Malarvannan has sinced written about articles on various topics from Finances, Tax Software and Business Tax. . Mani Malarvannan's top article generates over 2400 views. to your Favourites.
Thomas Mccarthy has sinced written about articles on various topics from Business and Finance, Finances and Computers and The Internet. Thomas McCarthy has designed, developed & implemented financial systems for many years. Thomas was a Factoring customer for over 7 years. Download our FREE EBook "Growing Your Company Without Debt" learn how Invoice Factoring may be right for your company. Thomas Mccarthy's top article generates over 22200 views. to your Favourites.
