Focus On The Right Goals – Part 3

In Part 1 of this series, we discussed how business owners need to focus on whether a sale will result in cash received.  In Part 2, we discussed how business owners need to consider the net cash – the gross profit – that a sale will achieve.  Building on this concept – and after taking a break recently to discuss our Spring client satisfaction results –  when I talk to people about accounts receivable financing/factoring, they will sometimes raise the issue of cost.  Yes, compared to a prime rate bank loan, our fees for working capital, outsourced professional credit and outsourced accounts receivable collection combined are certainly higher because we’re providing far more service in a far different risk category.  But so far they aren’t comparing correctly.  If a bank line of credit met a business owner’s needs, they wouldn’t be talking to us.  They’re meeting with us because a bank line isn’t available, or is too small to be sufficiently useful to them.

The correct calculation for a profitable growing business is:

  1. No additional cost or profit vs.
  2. Incremental sales from having unlimited working capital, less related cost of sales and other variable costs, less Liquid Capital advance fees, + value of lowered bad debt risk.

Our clients become our clients because they’ll be much better off if they do.

Sometimes we’re compared to bringing in an equity partner.  Professionals I speak with generally agree that is the most expensive solution. On day one it looks inexpensive, because little cash goes out the door other than for legal fees, but in year 2 when there’s a big dispute, or the co-owner wants to make more of the decisions, or is pushing for bad choices, or in year 10 when you have to pay them out for half the current value of the successful company, entrepreneurs realize that bringing on a partner was the most expensive decision they could have made.

Dan Effa

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