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Feb
27
2012

How can a Business Increase Profits Using Accounts Receivable Funding?

Posted by in Bank Program

In working with banks and providing an Accounts Receivable Funding Program through RMP Capital’s Community Bank Program, one question that is often asked is: “How can a business increase profits using Accounts Receivable Funding?”  The key to being successful on our program is what the business does with the money!  In other words, since Accounts Receivable Funding essentially puts a business on a cash basis, no longer waiting for customers to pay their invoices, the difference is how those funds are employed.

The following actual case study of a manufacturing business illustrates this point:  This business is a specialized steel fabricator and local manufacturer of metal parts currently doing 2.2MM in annual sales.  Gross profit is currently 27.5% and net profit is 2.2%.  Through traditional bank financing and the use of vendors extended terms, annual growth is only 10%.  But, by using existing equipment and facilities the market can support 40% annual sales growth.  Inventory is purchased in small lots due to lack of cash and the 2nd shift is inefficient due to inventory shortages.

The decision to use Accounts Receivable Funding was based on the following company goals:  Get current with vendors; selectively increase inventory for 2nd shift productivity increases; improve profitability to a minimum 6% net profit margin; and, get “debt-free” of their working capital loan.

The 90-day results are impressive:  Sales increased 18% to 2.5MM/yr; all accounts payables within 30 days; adequate inventory for efficient 2nd shift; material cost reduced 20% by direct mill run and truckload cash purchases, which equaled +9% in net profit margin; increased production with no increase in labor; and, now “debt-free” of their working capital loan!

The future profit and loss projections are as follows:

                         Before            at 20%             at 40%

Sales                 2,184,000       2,620,000         3,058,000

COGS               1,583,000       1,649,000          1,925,000

GP                      601,000           971,000            1,133,000

%                          27.5%                37.0%               37.0%

Net profit   49,000         345,000           478,000

                           2.2%                  13.2%                      15.6%

This is just one example of a business that had opportunities to employ a strategy of reinvesting cash on a daily basis to not only offset the higher funding costs, but increase net profit in the process.  Accounts Receivable Funding allowed this business to reach its full growth potential by tapping into their accounts receivables, usually a frozen asset, to solve their cash flow problem.

RMP’s professional Bank Consultants know how to talk to your customers and prospects to identify their growth opportunities, solve cash flow problems and increase profits.

RMP Capital Corp, headquartered on Long Island, NY, provides a hybrid, turnkey Accounts Receivable Funding Program that banks can refer to their customers and prospects at no risk or cost! Accounts Receivable Funding is an alternative to traditional bank financing, specifically to increase cash flow and fund growth.  Give us a call to see how RMP’s Community Bank Program can work for your bank.

Chuck Stover, Manger of Bank Relations

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