How Accounts Receivable Financing and Financial Management Functions
If you own a business, cobbling up a good sales strategy to woo customers, boost sales and make money is a smart move. But a smarter tactic would be to set up an account receivable collection and management procedure to ensure that customers pay on time, or that you can have access to other operating funds to expand the company or seize market opportunities. Account receivable financing enables a company to fill the funding void and steer its operations toward better financial management.
The Basics
Account receivables represent money customers owe a company. Business people mean the same thing when they talk about accounts receivable, receivables or customer receivables. Accountants categorize customer receivables in the “short-term assets” section of a corporate balance sheet, because the company expects to collect the cash owed within a year. A balance sheet – also known as a statement of financial position or statement of financial condition – is the report you review to identify a company’s resources, debt and owners’ equity.
Accounts Receivable Financing
Accounts receivable financing enables a company to receive upfront the amounts due from customers or other business partners. The business has various options to collect the receivables in advance: negotiate a deal with a bank, talk to an accounts receivable financing institution, reach an agreement with a supplier, or provide a discount to a customer. The last tactic may be an effective marketing ploy because it helps the client save money while cultivating a tighter relationship, a move that could prove to be a winner down the road.
As an entrepreneur, you can negotiate an accounts receivable financing deal with your bank. This plan may be more effective because the bank knows your company’s operations and financial information, and therefore might quickly process your funding application. Another way to receive customers’ money in advance is to reach a financial compromise with a specialized lender – say, a factoring institution. The company would advance you cash the customer owes you, after deducting a percentage – called a factoring fee.
A business also can canvass the offices of its suppliers to seek funding based on its customer receivables. The key element here is that a supplier agrees to provide goods and services to the company, with the assumption that funds collected from customers will be routed directly to the supplier. This funding method is different from the typical credit amount that vendors grant to clients in the normal course of business.
Money Management
Money management, or financial management, refers to all techniques an organization uses to track expenses and revenues, reduce costs, expand operations and spur profitability. Even non-profit entities, such as the government and charities, must draw up an effective money management plan to survive.
Connection
Account receivable financing and financial management are distinct concepts, but they interrelate in the way a business operates. Money coming from customers is the economic fuel that spurs corporate productivity. By funding its accounts receivable, an organization is able to access cash immediately, increase production, and invest in new opportunities that might help the business ascend to competitive stardom down the road. Receivable funding also meshes wish financial management because it helps increase a company’s working capital.
About Author: Andrew Cravenho is the CEO of CBAC LLC, an innovative invoice financing exchange. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship. https://cbacfunding.com/blog/
Category: Business
