What is the “useful life”
of printing equipment, and how do you depreciate it?
Wade Oldham outlines some changes to Taxation Office rules.
It has been some time since
I first wrote about the subject of cash fl ow finance and its benefits. Now with Christmas upon us and the usual cash leakage that occurs
at this time of the year I thought a recap would advantage many
as there is ample time between now and Christmas to get facilities
in place.
The Christmas cash shortage starts with close
downs and holiday wages to employees prior to Christmas and extends
through the early part of the next year from weaker sales and production
months in December and January. Not to mention customers on holidays
and experiencing the same cash shortage and withholding normal payment
terms. And just when you think everything should be returning to
normal in February you cop the business activity statement quarterly
whammy.
The answer, in most cases, is cash flow finance,
invoice discounting or factoring. Each has a defining difference;
however, they effectively provide the purchase by a factor and the
sale by a business of book debts (your debtors) on a continuing
basis, usually for immediate cash.
Now before some of you turn off, let me erase
some common misconceptions. Factoring during the ’70s and
’80s got a bad name as a “loan of last resort”
and of “sending companies broke”.
Fact 1:
yes, it was a last resort; however, mostly because it was misunderstood
and not pushed as a product by banks because banks could provide
an overdraft at the same price margin but with real estate security.
Fact 2:
most of the businesses that went broke did so because they were
not profitable. Factoring simply kept them buoyant a little longer,
and as a result got the blame.
A lot of businesses still utilise a bank overdraft
as a means of working capital. Unfortunately, it is often restricting
for growth because:
• you are restricted by the value of real estate assets (read
family home) as security;
• if you suffer a downturn in profit, a bank may view this
as a crisis and cite it as a reason for rejecting ongoing, existing,
or
increased facilities. An invoice discounter views this as an opportunity;
• if a partner leaves the business (wife or otherwise) withdrawing
funding or securities, a traditional bank may seek a reduction in
facilities. An invoice discounter can replace the funds by recognising
the value of accounts receivable or debtors;
• a business acquiring another business may require the initial
funding of the ongoing sales, or even plant and equipment.
A defining point of distinguishing factoring or
invoice discounting is that it is not debt, since the proceeds of
factoring are self-liquidating — that is, they are repaid
out of the proceeds of trade debtor receipts — no set monthly
repayments.
In addition to the “send you broke”
conspiracy, the other most common and misguided objection is that
invoice discounting costs too much. Think again. Isn’t “opportunity
cost” a figure in your decision making process to invest within
your business in any case? Then why not with invoice discounting
when evaluating a source of capital? As such the question of invoice
discounting begs another question — what does it cost you
not to use invoice discounting?
Some points to consider here are:
• by being able to grow the business (not being hamstrung
by cash) you may be able to win customers away from competitors
by either growing market share or maintaining market share in a
growing market;
• by having funds readily available you may be able to shift
the balance of power in negotiations with suppliers, opening opportunities
for receiving discounts for paying your suppliers inside trade terms
and netting these savings off against the cost of invoice discounting;
• the cost is usually “user pays” in that you
only pay for what you use, unlike traditional banking with line
fees, facility fees, risk margins, annual review fees, et cetera;
• the costs of factoring are often defrayed in circumstances.
As the invoice discounter gives you the option to carry out many
administrative functions you may be able to reduce salary costs
(or that clumsy clerk) and at the same time collect debts and increase
cash.
• invoice discounting is NOT disclosed to your customers (another
misconception) so you are free to maintain your own collection procedures
and deal with your customers in your own way.
Factoring and invoice discounting, then, can help
your business leverage its sales to generate the capital demanded
by, and a prerequisite for, growth. It provides a steady and flexible
source of funds and utilises that asset which may be your business’s
most valuable (debtors) and yet is often ignored by bankers.
Having stated the above, I hasten to point out
that factoring and invoice discounting are financial resources that
will not suit businesses which are under poor financial management,
have stagnant or declining sales, are not profitable, have a large
(50 per cent) portion of their sales with one customer, have a large
percentage of bad debts, or have a large percentage of their debtors
who pay in less than 21 days or more than 90 days.
Whatever challenge the New Year may bring, let’s
not make working capital one of them.
