# Flow Of Costs Through A Job Order Costing System Formula Factoring Accounts Receivable When Needing Cash

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## Factoring Accounts Receivable When Needing Cash

The lifeline of any business is their ability to convert receivables into cash. Accounts receivable factoring is an important part of being successful. Generally, it is a process where a good or service is provided and not paid for at the time of service. As a result, the balance is receivable.

To manage this part of the books effectively it is important to keep a steady flow of cash in the business. Many businesses have turned to service methods that collect payments at the time the service is rendered. This greatly reduces the risk of receivables and non-payment.

A point of service system requires the buyer to pay upfront for the service. In some cases, such as healthcare, the point of service accepts partial payments. This is because many times the full cost or fee for services is not determined until the patient is treated or discharged. Retail is different because you usually can’t take an item without paying for it.

In retail settings, point of service is nothing new. In fact many companies have installed credit and debit card machines into their cash register systems. This interface helps them accept electronic payments, personal and business checks for the purchased item.

Accounts receivable management is usually factored and recorded by a formula. This formula gives an indication of how timely the A/R is being collected. Days in A/R are a reflection of the ability to convert payables to cash. So if the days in A/R is 35, that means, on average, it takes 35 days from the time the product or service is provided to the time payment is made. The goal is to reduce this number. The lower it is the better sign that cash is coming in the door.

Improve your cash flow by factoring invoices

Factoring invoices, that is, selling invoices to another company (the factor), can be a great cash flow booster. There are many ways to get cash quickly when you’re in an accounts receivable business, but factoring is one of the easiest ways. It is an invaluable tool for an up and coming business that has many advantages.

Selling accounts receivable is more desirable than debt. Initially, it is easy because it does not require any credit history or collateral. Second, there is nothing to pay back because it is money that already belongs to the company. A buying company will purchase invoices set to collect from accounts receivable, so that’s the amount received, less any fees or percentages charged for the transaction. It is not necessary to return it because the invoices are for products or services already rendered.

There is not much work required. A lot of paperwork is eliminated as companies do not need to send first, second and final notices for payment. Statements are also removed. The money is transferred and the factor is the one who is responsible for collecting the money.

Invoices can often take thirty, sixty, and sometimes ninety days for companies to pay. When those days add up, businesses can suffer and sometimes go down. Small and medium-sized companies are the most vulnerable to cash flow problems and one week can make a big difference in the decision (or need) to close its doors.

Money is available immediately. Instead of waiting around for customers to pay their bills, companies can spend money on key aspects of their business, including equipment, marketing services, and other valuable necessities to help grow the business. There is no need to wait to buy these things when the wait to receive the accounts is over.

Getting money instantly also eliminates debt. By getting the money early, paying less in interest, the debt can be cleared quickly. Many companies also choose to sell their accounts receivable to avoid sending invoices to collections due to non-payment. No business should suffer because a customer doesn’t want to pay for a product or service they’ve already received.

Factoring can save a company money. While the company will lose some accounts receivable in fees, it can save that money through supplier discounts. Many vendors and suppliers will reduce bills by a percentage by paying before or on time. The easiest way to be able to do this is through the increased cash flow that factoring allows.

There are many companies that offer invoice factoring, but research is important. Free quotes are available from almost everyone, so it’s important to shop around. Each will have different caveats on purchasing accounts receivable, including the amount they purchase and their deductions. Every company is in business to make money, so it’s important to remember whose business comes first!

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