FACTORING AS A SOLUTION FOR BETTER FINANCIAL STATEMENTS
Have you ever thought how factoring can help you present your company as well as possible to potential clients or investors, in your financial statements? Whether you are an independent company owner or a financial manager, factoring can be of great benefit in maintaining the company's liquidity so that you can pay your obligations at any time, but also influence numerous other financial indicators that may be of importance to interested parties when making decisions.
In increasingly open and dynamic markets, companies face growing uncertainties and instabilities every day. Due to the nature of its business or the long payment terms given to customers, the company may find itself unable to finance its short-term obligations, whether it is obligations to banks based on taken loans or obligations to suppliers. In order to solve this problem, companies often resort to taking short-term loans from banks. However, the loan approval process can be one of the significant factors that make the company unable to quickly and efficiently obtain the necessary funds, which can cause additional costs to the company or prevent the quick implementation of the planned activity. Factoring is therefore an ideal solution for balancing the financial statements if the company has a problem with unmatured and unpaid receivables, and with assumed obligations towards its suppliers. Factoring is a financial business in which receivables are assigned or sold or liabilities are financed before they are due. In this way, factoring improves the cash flow of the business by providing liquid assets to establish a better maturity structure in the financial statements.
And how does factoring impact individual items in the balance sheet? Depending on the company's activities, it is very important that the company finances current assets as well as investment activities by following the golden rules of financing. They indicate the obligation to finance short-term assets with short-term sources, and long-term assets with long-term sources. In contrast to other ways of lending, where the debt increases the borrower's liabilities, with factoring, financing is done on the basis of assets (the part of assets that refers to receivables from customers). By means of a factoring arrangement, that is, by selling receivables before the due date, the company ensures cash flow. Accordingly, factoring contributes to the improvement of liquidity and accelerates cash flow - the average days sales outstanding (DSO) is significantly reduced. This debt collection efficiency indicator indicates whether the company will be able to effectively fulfil its obligations to the creditor, therefore this indicator is important for the presentation of the company's credit rating. Given that the cash that was tied up in receivables is released, it can be used to finance other business activities in the company.
In addition to these advantages, non-recourse factoring offers the possibility of eliminating the risk of non-payment by the customer, where the factor assumes the total risk of debt collection. With this type of factoring arrangement, the client does not post liabilities to the factor, but only changes the structure of current assets, which improves the company's liquidity (reduction in receivables and increase in cash).
Factoring, in addition to all of the above, also influences some financial indicators that give the users of financial statements a picture of the company's financial health and are a good instrument for comparisons between companies operating in the same or similar sectors. Through the factoring arrangement, various important indicators are improved, such as: the already mentioned debt-to-equity ratio, debt-to-asset ratio, state of indebtedness, debt and EBITDA, and the like. Stakeholders such as investors or credit institutions may require minimum values of these indicators to recognize a financially stable company with which they can cooperate, and given that debt ratios are involved, investors/creditors are interested in the lowest possible values of the indicators.
One of the important indicators that improves thanks to the use of factoring is the degree of indebtedness or "leverage", which shows the amount of debt in the structure of the company's financing sources, that is, it determines the quality of the company's repayment capacity. Accordingly, a higher amount of financial debt will result in a higher "leverage", which may indicate that the company financed its growth through borrowing. Therefore, the company can use the cash inflows arising from the use of factoring services to reduce its short-term liabilities, such as short-term loans or trade payables, which results in the reduction of ratios. Namely, if the level of long-term loans before the approval of factoring is €10,000, the level of short-term loans is €5,000 and the capital is €25,000, this indicator will be at the level of 0.6. However, if the company uses cash inflows coming from approved factoring, the value of short-term loans may be reduced, which will contribute to the reduction of this indicator. For example, a cash inflow of €4,000 can be used by the company to pay part of the short-term loan obligations, which will now amount to €1,000, while the value of the debt decreases and with unchanged values of other items, the indicator will be 0.44.
It is important to point out that the changing conditions of the modern market require better dynamics when deciding on the implementation of projects in the future. When making such a decision, managers should collect information and choose the form of financing that will provide additional liquid funds to the company in the most efficient way.
Whether you are in a phase of growth or want to provide additional liquid funds from unpaid receivables or obtain an additional rebate from suppliers for advance payment, Financial Solutions will be happy to help you find the best solution.
You can read more details about factoring and the cooperation process on our web pages related to the Process of cooperation and Factoring in the service to company growth. i Faktoringu u službi rasta preduzeća.