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 is a third actual case study. This time of a wholesale business that illustrates this point: This business is a wholesaler of specialty interior building products that does some fabrication. The company currently is doing around 3MM in annual sales. Gross profit is currently 24.6% and net profit is (1.2%). A large portion of this businesses capital is used to purchase material, which is at 44.4% of sales. The bank is unwilling to increase the current line of credit of $250K. When that happens, cash flow suffers and growth stalls. Why, because payroll obligations must be met bi-weekly, material cost invoices must be paid in a reasonable period of time, while their A/R invoices don’t get paid until 47 – 50 days. In fact, the business is missing all early-pay and bulk vendor discounts! In this example, the market could support 30% sales growth using existing facilities and staff.
The decision to use Accounts Receivable Funding was based on the following company goals: Have cash flow to support 30% growth; take advantage of 4.5% early-pay plus 7% bulk vendor discounts; and, get “debt-free” of their $250K working capital line.
The 90-day results are impressive: Vendor contracts re-negotiated for bulk buying; bid activity increased with growth imminent; net profit margin forecast up to 4.2%; and, now “debt-free” of their working capital line!
The future profit and loss projections are as follows:
Before at 30%
Sales 3.000,000 3,900,000
COGS 2,262,000 2,750,000
GP 738,000 1,150,000
Net profit (36,000) 164,000
This is just another 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, Manager of Bank Relations