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Written by Gregg Elberg
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Monday, 09 July 2007 |
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Word Count: 1274 Accounts Receivable Financing- The Weight
Cash flow is essential for every business. Cash flow is an accounting term
that refers to the amount of money received and spent by a business during a
specific period of time. Working capital is a similar but different financial
term that is based on the daily operating liquidity available to a business. To
calculate working capital, an accountant for the company takes current assets
and subtracts current liabilities. A company may have substantial working
capital but little liquidity because the working capital is either spent or owed
in matters of accounts receivable, inventory or accounts payable.
Cash flow is necessary to a company’s survival, especially for those companies
with limited access to financing. In particular, a company’s accounts receivable
and inventory may be like a weight preventing growth and expansion. The
Merriam-Webster Online dictionary has eleven different definitions of the word
weight when used as a noun. As used in this article, the word “weight” pertains
to four of these meanings:
“4 a: something heavy: load b: a heavy object to hold or press something down or
to counterbalance;
5 a: burden, pressure<the weight of their responsibilities> b: the quality or
state of being ponderous;
7 a: the relative importance or authority accorded something <the weight of her
opinions> b: measurable influence especially on others <throwing his weight
behind the proposal>;
8: overpowering”
Inadequate cash flow is a heavy load and a heavy burden that holds down growth
and productivity. Illiquidity creates a ponderous situation, such as whether or
not to accept a new order, which bills to pay or is the survival of the business
at stake? For instance, consider the example of a company that invented a weight
training machine.
After years of research and development the company obtained a patent on a
weight training machine that was designed for professional use at gyms. The
machine includes a main frame, a lever carriage mechanism, an adjustment linkage
and a stop mechanism. A lever carriage mechanism is pivotally connected to the
main frame. The lever carriage mechanism includes a weight carrying portion
adapted to carry at least one weight. An input mechanism is connected to the
lever carriage mechanism. The adjustment linkage is connected between the lever
carriage mechanism and the main frame and is configured to selectively adjust an
arc of rotation of the weight carrying portion of the lever carriage mechanism
about the main frame such that the weight carrying portion may selectively
traverse each of a plurality of predefined strength curves in response to
movement of the input mechanism by a user.
The machine has a catchy name; let’s call it the Flexigym. It works to burn
calories, make muscle and it is very popular with users. Suddenly, orders are
overwhelming the company/manufacturer. The irony is success is a weight on the
business and if the invoices for the Flexigym are not paid promptly this wait
period is a serious burden to liquidity and growth. What are the options for
improving cash flow for Flexigym?
Payments for inventory, sales commissions and accounts payable may be delayed.
Manufacturing plant maintenance may be deferred. Professional fees to attorneys
or consultants may be deferred. Most of these options may have negative
consequences.
There may be a positive solution. If the company sells its product or service to
other businesses accounts receivable financing may be the solution.
Accounts receivable financing creates instant cash for working capital. If
Flexigym cannot wait 30, 60 or 90 days to be paid, a commercial finance company
will purchase the accounts receivable and the wait for cash will be over. The
process is relatively simple.
Flexigym agrees to terms with a commercial finance company. The customers of
Flexigym are notified of this arrangement and instructed to send their payments
to the financing entity. After the Flexigyms are sold and delivered, the
commercial finance company verifies that delivery was satisfactory. Many finance
companies use an internet based system; some use fax. In either case, upon
receipt of the invoice and verification of satisfactory delivery 80% to 90% of
the accounts receivable monies due will be wired to Flexigym’s bank account. The
weight is lifted, the wait is over, and cash flow is available for exponential
growth. If accounts receivable financing is not sufficient for cash flow needs,
purchase order financing may be employed to further increase cash flow.
“The Weight” is the title of a song by The Band which was very popular in 1968.
The Band backed Bob Dylan on many occasions. The song is a good example of a
silent title record where the title never appears in the lyrics. Accounts
receivable financing is not obvious either unless you are educated regarding the
merits and details of this financial technique. Here are the lyrics to The
Weight:
“I pulled into Nazareth, was feelin' about half past dead;
I just need some place where I can lay my head.
"Hey, mister, can you tell me where a man might find a bed?"
He just grinned and shook my hand, "No!” was all he said.
Take a load off Annie, take a load for free;
Take a load off Annie, And (and) (and) you can put the load right on me.
I picked up my bag, I went lookin' for a place to hide;
When I saw Carmen and the Devil walkin' side by side.
I said, "Hey, Carmen, come on, let's go downtown."
She said, "I gotta go, but m'friend can stick around."
Take a load off Annie, take a load for free;
Take a load off Annie, And (and) (and) you can put the load right on me.
Go down, Miss Moses, there's nothin' you can say
It's just ol' Luke, and Luke's waitin' on the Judgement Day.
"Well, Luke, my friend, what about young Anna Lee?"
He said, "Do me a favor, son, woncha stay an' keep Anna Lee company?"
Take a load off Annie, take a load for free;
Take a load off Annie, And (and) (and) you can put the load right on me.
Crazy Chester followed me, and he caught me in the fog.
He said, "I will fix your rack, if you'll take Jack, my dog."
I said, "Wait a minute, Chester, you know I'm a peaceful man."
He said, "That's okay, boy, won't you feed him when you can."
Take a load off Annie, take a load for free;
Take a load off Annie, And (and) (and) you can put the load right on me.
Catch a cannon ball now, t'take me down the line
My bag is sinkin' low and I do believe it's time.
To get back to Miss Fanny, you know she's the only one.
Who sent me here with her regards for everyone.
Take a load off Annie, take a load for free;
Take a load off Annie, And (and) (and) you can put the load right on me.”
The bottom line: The Band was right. Take a load off yourself and be free from
cash flow problems. Consider the weight, the cost to eliminate the wait, and
whether accounts receivable financing is appropriate for your circumstances.
Copyright © 2007 Gregg Financial Services
www.greggfinancialservices.com
Mr. Gregg Elberg is a licensed attorney and licensed real estate broker. Gregg
Financial Services is a full service brokerage for commercial finance companies
and banks that fund B2B businesses. Mr. Elberg arranges funding from $25,000 to
$50 million per month at competitive pricing, and works to reduce your financing
costs as your company grows. For more information about GFS, please visit our
website:
http://www.greggfinancialservices.com
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