One of the biggest questions people have when they first start factoring is: “Is invoice factoring worth it?” And the simple answer is that, for most businesses, it absolutely is. Factoring accelerates cash flow like no other tool can and helps businesses avoid taking on debt. However, to move from an abstract idea of usefulness to a tangible measurement, you need to work with success metrics. Give us a few minutes, and we’ll walk you through what to track and why each area matters.
Success Metrics Demonstrate How Invoice Factoring Impacts Your Business
Success metrics, or factoring key performance indicators (KPIs), are tools you can use to measure the real impact invoice factoring has on your business. They turn broad ideas like “better cash flow” or “faster growth” into numbers you can track. By watching these business performance indicators over time, you can:
- Evaluate Financial Impact: Determine whether factoring is strengthening your liquidity and overall financial health.
- Guide Decision-Making: Use data to decide when and how to continue or expand your use of factoring.
- Align with Long-Term Goals: Confirm that the benefits of factoring are supporting your broader objectives, such as growth, efficiency, and competitiveness.
Cash Flow Improvement Metrics
Cash flow management consistently ranks as one of the top financial challenges for small businesses. In fact, more than a quarter aren’t comfortable with their cash flow, according to a recent U.S. Chamber of Commerce Small Business Survey. Invoice factoring is designed to help with this vital concern by accelerating access to funds that would otherwise be tied up in receivables. To determine whether factoring is working for your business in this respect, you can track the cash flow improvement metrics outlined below.
Days Sales Outstanding (DSO)
DSO measures the average number of days it takes to collect payment on invoices. If your DSO drops significantly after using factoring, it’s a clear indication that factoring is working for you.
Accounts Receivable Turnover
Accounts receivable turnover shows how many times per year receivables are collected. A higher turnover ratio indicates that invoices are being converted into cash more frequently, which is a direct result of faster funding through factoring.
Cash Conversion Cycle (CCC)
Your CCC tracks how long it takes to convert investments in inventory and receivables back into cash. Factoring shortens this cycle by reducing the time receivables remain outstanding, which improves overall liquidity.
Available Working Capital
Look at the amount of capital that’s accessible for operating expenses. After factoring, many businesses report higher working capital levels that allow them to cover payroll, pay suppliers promptly, or seize growth opportunities.
On-Time Vendor Payments
Making on-time or early payments to vendors consistently is a signal that cash flow is more predictable. This can also improve your relationships with suppliers and potentially open doors to better terms or discounts, plus can potentially boost your business credit score.
Liquidity Ratios
Metrics such as the current ratio or quick ratio may improve as factoring increases cash on hand relative to liabilities. These ratios are often used by lenders and investors to gauge the financial health of a business.
Cost Efficiency Metrics in Factoring
Tracking factoring cost efficiency allows you to evaluate whether the benefits of factoring outweigh the costs and how factoring influences the overall financial efficiency of your business. We’ll explore some of these factoring KPIs next.
Factoring Cost as a Percentage of Revenue
This metric calculates the total fees paid to the factoring company compared to overall revenue. Monitoring it can help you determine if the expense is proportionate to the value delivered.
Savings from Early-Pay Discounts
As touched on earlier, many vendors offer discounts for early payment. For instance, you might be offered two percent off if you pay the invoice within ten days. With factoring providing immediate cash, you can take advantage of these discounts, and the savings can substantially reduce or even offset the cost of factoring.
Reduced Overhead or Loan Fees
Businesses often rely on short-term loans, lines of credit, or overdrafts when cash flow is strained. If factoring eliminates or lowers the use of these higher-cost financing options, the net cost of capital decreases.
Administrative Time Saved
Small businesses lose an average of 14 hours per week chasing invoices, according to Intuit surveys. However, when the factoring company assumes responsibility for collections, your internal costs for accounts receivable management may decline.
Business Growth Metrics
When cash flow constraints are lifted, businesses can shift into growth mode. Let’s take a look at some financial performance metrics to keep an eye on here.
Revenue Growth Rate
Tracking year-over-year or quarter-over-quarter revenue growth can show you how factoring supports your ability to take on new contracts or scale existing customer relationships.
Customer Acquisition and Retention
Reliable cash flow allows you to accept new clients without worrying about payment delays while also maintaining strong service for existing clients. A rising client count or improved customer retention rate is a sign that factoring is translating into growth and stability for your company.
Order Fulfillment Rate
The ability to accept and fulfill larger or more frequent orders reflects how factoring frees up capital. For instance, if you previously had to turn down large purchase orders due to cash shortages but can now accept them, you have a clear sign of measurable growth.
Employee Growth or Retention
With factoring stabilizing payroll and reducing cash flow stress, businesses often see stronger employee retention. Some even expand their workforce, which is another concrete indicator of growth.
Operational Efficiency Metrics
In addition to improving cash flow, factoring can also streamline operations and reduce friction in financial management.
Invoice Processing Time
Tracking how quickly invoices are submitted, approved, and funded allows you to identify how much efficiency you’ve gained through factoring. Many businesses go from waiting months for payments to accessing cash within hours or days.
Bad Debt Reduction
Most factoring companies perform credit checks on your clients before approving your invoices. This reduces your exposure to clients who may fail to pay, which cuts down on write-offs and strengthens overall collections.
It’s worth noting that you may also be able to leverage non-recourse factoring to help with this. In a non-recourse agreement, the factoring company absorbs the loss if your client doesn’t pay an invoice for reasons such as insolvency.
Collection Success Rate
When a factoring company manages collections, businesses often see higher recovery rates and more predictable inflows compared to handling collections internally.
Management Bandwidth
With predictable cash flow, business leaders can devote more time to strategic priorities rather than daily cash crunches. This is harder to quantify but often shows up in metrics such as time-to-market on new initiatives or leadership productivity.
Boost Your Success Metrics with Invoice Factoring from Charter Capital
By providing efficient service, top-notch customer care, fast advances, and competitive rates, the right factoring company can help you take your business even further. Charter Capital has been doing this for decades and has a hard-earned reputation for being one of the best factoring companies in the country. If you’d like to boost your business success through factoring, request a free rate quote.
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