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Time Is Money!

Posted by in Bank Program

To a business owner, nothing could be further from the truth. The more time and effort a business owner puts into his/her business likely means more money and success will be achieved. But sometimes a business can reach a point of diminishing returns, through no fault of their own.

Take a typical small business scenario: A business experiences growth; cash flow becomes tight as working capital becomes tied up in inventory and receivables; the business gets a line of credit; the business continues to grow with increased dollars tied up in inventory and receivables; cash flow again becomes a problem; the business cannot pay down the line of credit as required by the bank; the line of credit is converted into a term loan; the term payments make cash flow worse; ongoing cash flow problems cause the business to miss supplier discounts and other opportunities to grow and increase profitability; growth and profitability slows down or declines; the business still has cash flow problems; the business borrows more money; the cycle repeats, and; the business never gets out of debt!  Does this happen to every business?  No!  But does it occur in most businesses at some time or another when they are under-capitalized?  Yes! So, is the answer always more money? Maybe, but maybe not!

In the past, banks have found innovative ways to lend more money, such as asset-based lending, which is lending on receivables and inventory to collateralize a loan.  Although, usually done with larger businesses with 15+ million in sales, it is starting to become common today for banks to offer it to smaller businesses with good credit.  But, the above typical small business scenario can still occur in asset-based lending.  There is only one business financing tool that can break this vicious cycle…true accounts receivable financing or factoring.  RMP Capital Corp. offers a similar program through our Community Bank Program called Accounts Receivable Funding. What’s the biggest difference between asset-based lending and RMP Capital’s Accounts Receivable Funding Program? Time! And, in this instance, time is money!  Asset-based lending does not accelerate cash flow.  It just adds more debt to invest more working capital into inventory and receivables.  Sometimes it works and sometimes it doesn’t.

Only Accounts Receivable Funding, the purchase of accounts receivable invoices and converting them into cash, decreases the life cycle of the working capital dollar.  Here is a mathematical approach to prove the point.

When a typical business invests $1.00 of working capital, it generally takes about 45 days until a product or service is sold and an invoice is created.  And, it generally takes about 45 days or longer in today’s environment, until that invoice is paid.  Therefore, in this example the life cycle of the working capital dollar is approximately 90 days.  Divide 90 into 360 (one year) and the working capital dollar is turning four cycles per year. If the sales price of that $1.00 working capital investment is $1.67 and assuming a gross profit margin of 40%, then (1.67 x .40) = gross profit of .67.   Four cycles x .67 = cumulative gross profit of $2.68.

With Accounts Receivable Funding, the invoice is converted into cash within 24 – 48 hours after it is created.  That means, now the life cycle of the working capital dollar is 45 – 60 days.  Let’s use 60 days to be conservative. Divide 60 into 360 (one year) and the working capital dollar is turning 6 cycles per year.  Assume the fee for providing cash within 24 – 48 hours for a 45 day collection period is 2.75% or (.0275  x 1.67) = .05.  Therefore, adjusted gross profit is .67 – .05 = .62. Six cycles x .62 = cumulative gross profit of $3.72.  A 39% increase in gross profit!

This works as long as the business can increase sales and fulfill those new orders with the increase in cash flow alone (fixed costs such as office space, equipment, admin, phones, etc. do not increase in the short term-thereby utilizing previously unused sales and/or production capacity).

So, even without considering the advantages of other opportunities, like early pay vendor discounts, bulk purchase discounts, extended payment terms to their customers, funding a retirement plan, paying off an existing line of credit, etc., a business can quickly become more profitable by achieving its full growth potential.  The cash flow problem is solved because the business now has a permanent source of working capital that accelerates equal to sales growth, which we like to call “Turbo-charging Your Working Capital Dollar.”  RMP’s professional Bank Consultants are experts at showing your bank customers and prospects how to remove the burden of time (waiting for payments) off the back of a business to increase profitability.  Now, less time is more money!

RMP Capital’s Community Bank Program provides a hybrid, turnkey Accounts Receivable Funding Program that banks can offer their customers and prospects at no risk or cost!  It is an alternative to traditional bank financing specifically designed to increase cash flow and fund growth companies.  It’s a great way for community banks to grow deposits and generate recurring fee income revenue!  Give us a call to see how
RMP’s Community Bank Program can work for your bank.

Chuck Stover, Manager of Bank Relations

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