Small business owners know how important budgeting is to their success. Budgets guide most of their decisions—such as purchasing equipment, updating office space, or expanding staff—and help to keep their businesses in the black. Problem is, budgets are based on predictions, but in reality business rarely follows a predictable path.
Budgets take on even greater importance for small businesses looking to expand. They must be stringent enough to keep the core business on track, but flexible enough to take advantage of opportunities and weather the unexpected. It gets even trickier when revenue varies from month to month.
Enter invoice factoring.
Invented as a way to smooth out cash-flow cycles, invoice factoring (or receivables factoring) gives businesses the power to sell invoices for immediate payment. The following tips can help businesses use invoice factoring as a tool to keep their budget strong and nimble.
1. Use Factoring to Track Expenses
A small business owner should know where every dollar is going. In this sense, a budget is the measuring stick for how well they're predicting and responding to fluctuations in revenue and expenses. The budget should account primarily for recurring fixed expenses (payroll, rent), but include enough breathing room to accommodate unexpected expenses that can vary from month-to-month. With the added flexibility of factoring, business owners can be more confident in their ability to assess and invest in new opportunities.
2. Use Factoring to Reduce Uncertainty
Uncertainty with payments can put stress on any budget. Some payments may be received in 30 days, others may exceed 60-90 days, and still others may never arrive at all. Government contract invoices—which typically take longer than those from the private sector—can further complicate matters. Factoring solutions can stabilize cash flow by placing accounts receivable on a more predictable schedule.
3. Use Factoring to Improve Responsiveness
Business owners should always check outstanding invoices against the monthly budget. This comparison provides a clear picture of the health of their businesses, and reveals any imbalances between accounts receivable and actual cash flow that might be obscured by lapses in payment. Cash flow deficiencies will be identified immediately, allowing the business to quickly respond with an alternative such as invoice factoring.
4. Use Factoring to Empower Employees
Transparency can empower staff to accomplish business goals while remaining within budgetary constraints. Business owners might consider sharing monthly, quarterly or annual reports, which provide employees with insight into the health of the business and gives them ownership over its future success. Informed employees understand how their daily decisions impact the bottom line.
You might also be interested in
Invoice Factoring Basics
How Factoring Services Work
5 Common Pitfalls with Selecting a Factor for Your Small Business