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.
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.
As financial challenges for small businesses grow more complex, owners face mounting pressure and cash flow strain.
August 19, 2025, Houston, TX — Leading invoice funding company Charter Capital reports that inflation, delayed payments, and tighter lending conditions are weighing on small business finances. Additional insights are shared in “How to Tackle Top Financial Challenges for Small Businesses,” now available at CharCap.com.
The release comes on the heels of the latest U.S. Chamber–MetLife Small Business Index, which notes that more than a quarter of small businesses are still uncomfortable with their cash flow. National Federation of Independent Business (NFIB) data echoes the sentiment, with many businesses reporting rising costs, inflation-related strain, and difficulty securing financing as persistent concerns.
“Small business finances aren’t strained by one issue. They’re being tested from multiple directions,” explains Gregory Brown, Co-founder and Executive Manager at Charter Capital. “When these pressures converge, they create persistent cash flow challenges, which helps explain the number of business owners expressing concern.”
Brown emphasizes that while small businesses may manage through one or two challenges, compounded issues such as inflation, delayed payments, and higher operating costs make financial management significantly more difficult. These overlapping pressures can disrupt projections and increase the risk of shortfalls, especially for businesses without structured financial forecasting in place.
He also stresses the importance of identifying potential cash flow gaps early. With better visibility into upcoming expenses and receivables, businesses can take proactive measures to manage business expenses, tackle challenges like slow-paying customers, and bridge gaps without pressure.
“Funding solutions like factoring can be especially helpful for the one in four small businesses that feel uncertain about cash flow, since it can be arranged ahead of time and used only when needed,” Brown adds. “While many businesses use factoring consistently, it also serves as a safety net when cash flow is disrupted by late payments, unexpected costs, or other financial pressures.”
Those interested in learning more about invoice factoring or who would like to request a complimentary quote may do so by calling 1-877-960-1818 or visiting charcap.com.
About Charter Capital
Headquartered in Houston, Texas, Charter Capital has been a leading provider of flexible funding solutions for the B2B sector for more than 20 years. Competitive rates, a fast approval process, and same-day funding help businesses across various industries secure the working capital necessary to manage daily needs and grow. To learn more, visit charcap.com or call 1-877-960-1818.
Each year, tens of thousands of small businesses across the country apply for invoice factoring, according to the latest Fed Small Business Credit Survey. While the transition to factoring is typically seamless, it works differently than most funding solutions business leaders are accustomed to. Below, we’ll explore what sets it apart and how to ensure you get off to a smooth start.
Why Businesses Transition to Factoring
It’s often said that cash flow is the lifeblood of all businesses. However, making sure you have enough money coming in to cover the expenses that are leaving your account at any given time is a bit of a balancing act with lots of potential disruptions. For instance, if your cash inflows stop or become sluggish due to slow-paying customers or a seasonal lull, it becomes difficult to cover everyday expenses. Equally, if your outflows increase, even temporarily, due to business growth or unexpected expenses, your standard inflows may not be enough to cover them.
Larger companies have access to more financial tools, solutions, and reserves, so it’s easier for them to weather these challenges. Smaller businesses often lack in these areas and have been traditionally underserved by the banking industry. This creates a need for unique funding and cash flow solutions, like invoice factoring.
Factoring Works Differently Than Traditional Financing Solutions
Instead of getting a lump sum that you have to pay back over time with interest, like you would with a traditional business loan, invoice factoring unlocks the cash trapped in your unpaid invoices. This is money you’ve already earned, but might not receive for weeks or months, depending on the payment terms you set with your clients.
In short, you’re selling your invoices at a slight discount to a factoring company, also called a factor, like Charter Capital. You receive most of the value of the invoice upfront, and the factor takes over the collections process, freeing you from chasing invoices. When your customer pays the factor, you receive the remaining sum, minus a small factoring fee.
Factoring vs. Accounts Receivable Financing
Factoring is often considered a subset of accounts receivable financing or even confused with it. However, it’s important to note that these are two very distinct funding solutions. With financing, the invoices serve as collateral on a loan that you’re taking out with interest and fees that you have to pay back. You still handle the collections process and then make payments to the lender. With factoring, you’re selling the invoice, and there’s nothing to pay back. You also get the added benefit of back-office collections support.
You Free Up Working Capital without Debt
You can use the cash in whatever way suits your business best, whether that means meeting payroll obligations, purchasing equipment and supplies, or investing in your business in another way. Because factoring is not a loan and your customer clears the balance when they pay the invoice, there’s no debt or interest for you to repay. This leads to factoring benefits like:
Stronger Balance Sheets: Factoring doesn’t show up as a liability on your balance sheet, which can improve your debt-to-equity ratio and make your business more attractive to lenders or investors.
Preserved Credit Capacity: Since factoring doesn’t involve borrowing, it doesn’t impact your existing lines of credit or make it harder to qualify for loans in the future. Because of this, many businesses don’t “transition to factoring.” They use it alongside other funding sources as needed.
Potential Discounts: Oftentimes, vendors offer early payment discounts or bulk discounts. Factoring can enable you to take advantage of these options, ultimately saving your business money.
No Monthly Repayments: You’re not adding a new bill to your monthly obligations when you leverage factoring. This makes it easier to focus on the future and plan.
Cash Flow Management is Easier with Factoring
A mere 42 percent of B2B payments arrive on time, according to Atradius. Not surprisingly, this also means most small businesses experience financial challenges due to payment delays. Factoring helps you take control.
Predictable Access to Capital: With factoring, you know exactly when funds will come in, which allows you to manage your payables without second-guessing yourself.
Eliminated Waiting Periods: Instead of building a cash flow plan around invoice aging, you can get paid within days and focus on the future.
Less Stress Around Collections: Most factoring companies take care of collections for you and do so in a customer-centric way. This gives you hours back each week and the freedom to focus on growing your business.
Getting Approved is Fast and Easy
Generally speaking, denial rates for business funding are staggering. Only about half of the businesses that apply for funding receive the full amount, according to the Small Business Credit Survey. Looking specifically at business loans, the figure is less than 40 percent. And even though SBA loans and lines of credit are typically thought of as more accessible, less than one-third of businesses that apply receive full funding. Factoring is different.
All of these traditional solutions rely on the same rigid criteria, such as your business credit score, personal credit, time in business, debt ratios, and more. Meanwhile, factoring companies are more concerned about the likelihood of your customer paying on time. In other words, if your customers are established and creditworthy, you’re likely to be approved for factoring. This is true even if your business is newer or credit-challenged.
Additionally, funding is directly tied to the value of your invoices. This also means your access to funding automatically scales with your business.
For instance, at Charter Capital, you can receive your factoring quote and terms the same day you apply. There’s no minimum credit score to qualify, and you can even get funding on your invoices the same day you submit them.
7 Simple Tips for a Smooth Transition to Factoring
Getting started with factoring is a seamless process when you’re working with a top invoice factoring company. You’ll likely go through an onboarding process, and they’ll walk you through each step. However, following the tips outlined below can help ensure you’re prepared and make your transition to factoring even smoother.
1. Ensure Business Factoring is a Fit for Your Needs
Factoring is a bit like the Swiss army knife of the funding world, so it works in a lot of situations. However, it’s still important to compare the fit before you proceed. If the situations below apply to your business, it’s worth exploring.
You Need Working Capital Quickly: Advances typically arrive in 24 to 48 hours, though some companies like Charter Capital offer same-day payments.
You Invoice Other Businesses: Most factoring companies only fund B2B invoices. If your clients are consumers, you’ll likely need to find another solution.
You Experience Long Payment Cycles: If slow-paying customers are holding back your growth or making it hard to meet expenses, factoring can help level out your cash flow.
You Don’t Want Debt: Factoring does not add debt to your balance sheet, so it’s ideal for those trying to minimize their debt. However, sometimes, debt can be good, especially if you’re trying to establish your credit. If this is something you’re working on, factoring can make it easier for you to manage your payables, which indirectly supports strong credit.
2. Assess Your Business’s Readiness for Factoring
Once you set the wheels in motion with an application, things can move fast. It’s helpful to ensure your business is ready to go when you submit an application.
No Conflicting Liens on Receivables: If another entity, such as a lender or the IRS, has already placed a lien on your invoices, the factoring company cannot fund you until it’s resolved.
Invoices Are Clear and Current: Avoid invoices with disputes, vague terms, or outdated charges. Factoring companies typically only work with invoices that are free of issues and newer.
Your Clients Are Creditworthy: Since funding is based on your customers’ ability to pay, factoring companies will look closely at your client base.
Your Invoicing Process is Reliable: You should have a system in place for issuing timely, professional invoices that clearly outline payment terms.
You Have Access to Essential Documents: The factoring company will want to see proof that your business is operating legally and will ask to see common financial documents.
3. Know What You Need from Your Factoring Agreement
When you’re applying for a loan, there are very few “levers” you can pull to adjust your terms. For instance, you might opt for a 20-year loan instead of a 30-year loan to reduce the cost of borrowing. With factoring, it’s a little more nuanced than this, so it’s helpful to understand the different options available to ensure your agreement matches your needs.
Recourse vs. Non-Recourse: In a recourse agreement, you are responsible if your client fails to pay. In a non-recourse agreement, the factoring company absorbs the loss under certain conditions. The latter typically costs a little more because of this protection. Because of this, and the fact that clients are typically vetted before an invoice is accepted, most businesses opt for recourse factoring.
Spot Factoring vs. Contractual Factoring: Spot factoring lets you fund individual invoices as needed. Contractual agreements typically involve a longer-term commitment and volume minimums. Both options have benefits. Spot factoring tends to give businesses more flexibility and control over costs, while contractual options often come with discounts.
Term Lengths and Cancellation Terms: Some agreements auto-renew or have cancellation fees. Charter Capital does not require long-term contracts, and you stay in control of which invoices you factor, so these issues are not a concern. However, you should be aware that they can be part of some agreements and decide in advance if they’re something you’re willing to accept.
Advance Rates and Fees: Advances are typically between 60 and 90 percent of the invoice’s value. The ceiling is often determined by your industry, risk level, and other factors. However, you can sometimes receive greater or lesser amounts, which can impact your overall costs.
4. Prepare Your Financial Documents and Be Ready for Factoring Setup
Although we touched on this earlier in terms of factoring-readiness, it’s worth covering separately. A few things you’ll want to have ready when you apply are outlined below.
Proof of Business Formation and Identity: This usually includes your Articles of Incorporation, a driver’s license, and a voided business check.
Accounts Receivable Aging Report: This gives the accounting company a snapshot of your unpaid invoices and payment patterns.
Customer Contact Information and Contracts: Factoring companies may need to verify the legitimacy of invoices or reach out to clients. Most will be familiar with factoring, so the process is a breeze.
Bank Statements and Tax ID Numbers: These are often requested during underwriting to help verify business legitimacy and set up your funding account.
5. Select the Right Factoring Company
Businesses often focus on rates when choosing a factoring company. However, some of the best factoring companies charge a little more upfront, but remain competitive, offer better service, and don’t nickel and dime you. Keep the following areas in mind as you compare factoring companies.
Service and Support: Look for responsive customer service and account managers who can walk you through funding, answer questions, and support your clients if needed.
Clear, Transparent Pricing: Rates should be easy to understand. Ask for a breakdown or to see how one of your invoices would be handled.
Fast, Reliable Payments: Ask how quickly you’ll be paid after submitting an invoice and clarify when the reserve will be released.
6. Communicate with Your Team and Clients
Factoring impacts how payments are processed, so your internal team and external clients should be kept in the loop.
Notify Your Billing or Accounts Receivable (AR) Staff: Make sure your team understands the new process, including where to send invoices and how payments are tracked.
Update Clients Professionally: Clients are notified about the shift and where to send payments during setup, but it helps to give key clients a proactive heads-up.
7. Fold Factoring into Your Business Operations
Once your factoring setup is complete, integrate it into your workflows so it becomes a seamless part of your financial operations.
Designate an Internal Point Person: Try to have a single person responsible for managing the factoring relationship to prevent confusion and keep communication efficient.
Track Funded Invoices and Reserves: Stay on top of which invoices have been funded, when the reserve will be released, and how fees are deducted.
Monitor Cash Flow with New Timing in Mind: With faster payments coming in, you may be able to accelerate vendor payments, payroll runs, or growth investments, but it helps to build a new cash flow rhythm.
Keep Records Organized: Maintain clear documentation for audits, renewals, and client questions. Most factoring companies provide portals or reports to help with this.
Streamline Your Transition to Factoring with Charter Capital
At Charter Capital, our motto is “Factoring Made Simple.” There are no application or sign-up fees. Approvals and clear terms are provided on the day you apply. And, our decades of experience mean you’ll benefit from a smooth process with free collections services, competitive rates, and no long-term contracts. To learn more or begin the transition to factoring, request a free rate quote.
Did you know that just two in five small businesses that apply for funding are approved for all the funding they seek, according to the latest Small Business Credit Survey? Nearly a quarter are completely denied, and the rest land somewhere in between; in that awkward place where they get some of the cash requested, but not enough to do what they actually need to do. While this may seem grim, there are still lots of often-overlooked business funding tips and tricks. In this guide, we’ll walk you through what you can do before applying, while applying, and after funding to help ensure you get the most capital possible and maximize its use.
Naturally, your credit score is a major deciding factor if you’re seeking traditional funding. Unlike personal credit scores that are managed by Equifax, Experian, and TransUnion, which range from around 300 to over 800, your business credit score can be anywhere from 0 to 100. You’ll still have different scores based on the credit bureau, but in this case, it will be Equifax, Experian, and Dun & Bradstreet (D&B).
Check Your Profiles: Check with each bureau to confirm the info they have about you is accurate and follow up on a regular basis to ensure it stays that way.
Build Where You Can: Establish trade lines with your suppliers and leverage credit in small amounts that you can pay off quickly to begin building your score.
Minimize Debt: Avoid taking on debt and reduce debt ratios whenever possible, so funding companies see you’re managing finances wisely and can afford payments.
Organize Your Financial Documents
Have clean, up-to-date records. Lenders and investors want to see tax returns, profit and loss statements, and cash flow forecasts.
Know Your Numbers
Build business financial literacy skills. This will help you improve your numbers and boost lender confidence. Explore key areas like tax planning, bookkeeping, budgeting, forecasting, and financial statement analysis.
Diversify Revenue Streams
Businesses with multiple revenue streams are typically more stable because they’re not reliant on a single area. If customer demand, supply chains, or other areas shift, you have something else to fall back on. Because of this, the perceived risk of lending to your business is often reduced, and you can often secure larger funding amounts.
Build Strong Banking Relationships Before Seeking Business Loans
Once you have a strong foundation, explore various funding options to find the right fit and start applying. The following tips will help improve your chances of success.
Apply For Small Business Funding Before You Need Working Capital
Explore working capital options before you’re in a bind and apply before you need funding. This serves two major purposes. First, your business will look better on paper when it’s financially strong, so you’re more likely to get approved and qualify for the level of funding you need. Secondly, this approach allows you breathing room to make informed choices. If you wait until you’re unsure if you can cover payroll or order supplies, you’re more likely to accept whatever terms you’re offered, even if they’re not great and won’t benefit your business in the long run.
An option like small business invoice factoring is often ideal in these situations, as you can get approved and ensure funding is available ahead of time, and then not use it or pay any fees unless you actually factor an invoice. This can help you manage costs better and speed up the funding timeline if you face an unexpected expense or hit a bump in the road later.
Have a Professional Business Plan
A well-written plan with market analysis, financial projections, and an outline of how you plan to use the funds speaks to your professionalism and demonstrates that any money invested in your company will be well spent, which boosts the confidence of lenders and investors. Alternative funding companies also appreciate seeing business plans.
Explore Alternative Funding Options
By default, most businesses turn to bank loans for funding. However, approval rates are even lower for traditional business loans than other options, with two-thirds of applicants receiving denials, according to the Small Business Credit Survey.
Moreover, there are some nuances between “good debt vs. bad debt.” For instance, if taking on debt allows you to increase the net worth of your business or has future value, it often fits in the “good debt” category. But if it doesn’t add to your net worth or could potentially leave you with nothing to show for your payments, it’s likely in the “bad debt” category. When these situations apply, consider alternative financing.
That might mean using venture capital for startup financing or tapping into merchant cash advances (MCAs). However, it’s important to be mindful of how these choices impact your equity and profitability, as equity dilution may hinder your ability to make decisions, and MCAs tend to come with high costs.
Invoice factoring also fits into the alternative funding category, but it’s different because it’s not a loan, so there’s no debt to pay off, and it doesn’t reduce your equity. It’s an advance on your unpaid B2B invoices.
Keep Personal Finances in Good Shape
Many lenders still look at personal credit scores. Especially for small businesses, your financial habits impact perceived risk.
Maximizing Business Capital Post-Funding
At this stage, you’ve strengthened your financial position, applied for funding, and received at least some of the money you needed. Here’s how to ensure that cash goes as far as possible.
Use Funds Strategically
It can be difficult to stay focused on your business goals as competing priorities emerge. However, it’s essential to use your funds for their intended purpose. It may help to use a project management system like Wrike or Asana to break your big-picture goals into smaller milestones, so you always have your goals at the forefront of your mind and stay on track.
Burnout and decision fatigue can also lead to unnecessary spending. Delegate tasks whenever possible to ensure you have the bandwidth to oversee your business activities strategically.
Some loans have reporting or financial performance requirements. Keep up with them to avoid defaults or higher rates.
Track ROI on Every Dollar
Measure the effectiveness of your funding use. This can help you justify the need for funding later and adjust your strategy in real time.
Maintain Communication with Lenders and Investors
Transparent updates build trust, which makes renewals, extensions, and future fundraising much easier.
Maximize Your Business Funding with Invoice Factoring
Invoice factoring is unique, so it helps businesses in lots of different ways. For instance, it’s accessible, even to businesses that don’t have strong credit or are just starting out. This means you can use it as your core source of funding even if other avenues are closed.
While you’re using it, it can help you maintain healthy cash flow and engage in activities that boost your credit, which may make it easier to qualify for traditional bank loans and other credit-dependent funding options down the road.
Many businesses also leverage it to fill gaps left by other sources. For instance, if you need $100,000 to purchase equipment but only get a $50,000 loan, you can factor $50,000 worth of invoices to reach the total sum needed and start generating more revenue faster.
As expenses rise and the economic climate shifts, profit margins are dwindling for small and midsized businesses across the country. While many have raised their pricing as a means of maximizing profitability, the approach can backfire and may not be right in every situation. In this guide, we’ll explore business profitability strategies you can use to support your company’s long-term health and growth without putting your customer relationships at risk.
Profitability in Small to Mid-Sized Businesses: A Quick Overview
Everyone knows that profitability is essential for businesses, but ensuring you stay profitable is easier said than done. Before we get into profit margin optimization, let’s explore the basics a bit.
Key Types of Profit
Profit is typically measured in three ways. Each offers a different view of your business performance.
Gross Profit: Your gross profit is a measure of how much money remains after subtracting the direct costs of producing goods or services from your revenue.
Operating Profit: Your operating profit reflects what’s left after you deduct overhead and routine business expenses from your gross profit.
Net Profit: Your net profit shows the final amount your business keeps after all costs, taxes, and interest have been paid.
Challenges that Undercut Profitability
Smaller businesses often face narrow margins and limited flexibility, which makes it harder to absorb cost increases, weather late payments, or reinvest in new opportunities.
Low Profit Margins: The average net margin is around seven percent, according to NYU. This means even a minor shift in expenses or revenue can erase your gains.
Unstable Cash Flow: You can be profitable and still not have cash on hand, which can impact your ability to cover daily expenses and grow. Because of this, 82 percent of small businesses that fail can trace their issues to cash flow management, Forbes reports.
Overlapping Roles: Owners and managers often handle operations, sales, and finance themselves. This limits the time that’s available to focus on maximizing profitability.
Fixed Expenses: Rent, payroll, and utilities stay constant, even when sales slow down. If revenue dips, these costs quickly eat into your profit.
Revenue vs. Profit: Why the Difference Matters
Maximizing revenue and maximizing profit are two different goals. Knowing how they differ is essential to building a strong, healthy business and reaching your objectives. Revenue refers to the total income your business earns from sales. Profit is what remains after subtracting all your expenses.
A business can grow its revenue year over year and still struggle financially if costs increase just as fast or faster. For example, expanding your product line might boost sales, but if production or fulfillment costs aren’t controlled, your profit could shrink.
Profit-focused growth tends to be more sustainable because it considers efficiency, pricing, and customer value, not just volume. Companies that optimize for profit often review their cost structures, refine their pricing strategies, and align offerings with high-margin opportunities.
To strike the right balance, track both revenue and profit KPIs like cost of goods sold (COGS), gross margin, and net profit, and evaluate how pricing, operations, and customer behavior affect each. This approach helps you grow smarter, not just faster.
Strategies to Increase Revenue and Improve Profit Margins
Businesses that want to improve profit margins often start by increasing revenue. Below, we’ll explore a few revenue growth strategies that can help.
Diversify Revenue Streams
Relying on a single income source puts your business at risk. If demand shifts or competition tightens, your entire model can become unsustainable. Diversification builds resilience and opens the door to new profit centers.
Add Complementary Services: Consider what else your customers may need once they buy from you.
Create Tiered Offerings: Introduce premium, standard, and budget versions of your core offering. This allows you to serve different customer segments without lowering your prices across the board.
Explore New Channels: If you currently sell only through one method, consider expanding into another area that will allow you to increase your reach without adding major overhead expenses.
Optimize Pricing Models
Many businesses underprice their products or services out of fear that they might lose customers or be undercut by competitors. If your business is in this group, small adjustments can have a big impact.
Review Costs Regularly: Costs change. If your prices remain static while expenses rise, your margin shrinks. Make price reviews a scheduled part of your operations.
Test Value-Based Pricing: Instead of pricing based on cost alone, consider what your product or service is worth to your customer. It may support a higher price if it saves them time or reduces risk.
Use Strategic Discounts: Be wary of offering blanket discounts, as they can erode profit margins. Instead, offer limited-time or volume-based promotions that are tied to specific business goals, like clearing excess inventory or boosting early renewals.
Enhance Customer Retention
If you aren’t applying customer retention strategies, you should be. It can cost up to 25 times more to acquire a new customer than to retain an existing one, according to Harvard Business Review (HBR). Plus, loyal customers tend to buy more often, spend more in each order, refer others, and cost less to serve over time.
Strengthen Onboarding: A strong start improves satisfaction and reduces early churn. Ensure customers know how to get value from what you offer as soon as they start leveraging your products or services.
Stay Engaged: Regular follow-ups, personalized communication, and proactive service can all help keep your business top of mind and ensure a smooth experience.
Create Repeat Incentives: Loyalty programs, subscriptions, and reordering tools make it easier and more appealing for customers to come back.
Reduce Operational Costs to Boost Profitability
Reducing business expenses is one of the most direct ways to improve profitability. However, it’s essential to identify areas for cost management that can improve efficiency without weakening your customer experience or limiting your growth potential.
Review Recurring Charges: Subscriptions, software licenses, and service contracts can quietly balloon over time. Cancel anything that’s unused or redundant.
Compare Vendor Rates: Pricing for supplies, freight, insurance, and other services vary widely. A competitive review every year or two can help you identify savings opportunities.
Track Category-Level Costs: Group expenses by function, such as sales, operations, or administration, so you can see which areas are growing disproportionately.
Improve Internal Business Efficiency
Operational waste often hides in everyday routines. Streamlining how work gets done can help you lower costs without reducing output.
Automate Repetitive Tasks: If your team spends hours entering data, tracking time, or processing orders manually, automation software can reduce labor costs and errors.
Standardize Processes: Inconsistent procedures can create confusion and waste time. Documented workflows help teams move faster and reduce rework.
Invest in Training: Skill gaps lead to mistakes and delays. Improving employee training often pays for itself by reducing inefficiency.
Control Variable Expenses
Unlike rent or salaries, some costs fluctuate with your level of business activity. These are easier to adjust but still require attention.
Monitor Inventory Levels: Excess inventory ties up cash and leads to spoilage or obsolescence. Just-in-time restocking and better forecasting can reduce waste.
Limit Overtime: Occasional overtime is fine, but frequent use may signal a need for better scheduling or staffing.
Outsource Select Functions: For roles that do not require a full-time hire, such as bookkeeping, marketing, or IT support, outsourcing can help reduce overhead costs.
Financial Planning for Profit Maximization
Financial planning gives you the framework to understand where your business stands today, where it’s headed, and how to course-correct before small issues become major setbacks.
Set Clear Financial Targets
To boost profitability, you need specific, measurable targets that guide your daily decisions.
Define Profit Goals by Period: Break annual targets into quarterly and monthly benchmarks so you can identify trends and react early.
Tie Goals to Activities: Link sales goals to lead volume or close rates. Link expense targets to specific departments or functions.
Review Targets Regularly: Business conditions change. Ensure your goals reflect the current environment.
Build and Maintain a Cash Flow Forecast
Understanding your cash position is essential for effective planning. A cash flow forecast helps ensure that you can meet your obligations while pursuing growth.
Project Income and Expenses: Include all sources of revenue and all fixed and variable costs.
Update Frequently: A static forecast can become inaccurate in the blink of an eye. Review and revise your forecast monthly or more often if your business is seasonal or high-volume.
Model Scenarios: Build best-case, expected, and worst-case projections, so you will know how various outcomes affect your cash flow and profitability.
Separate Strategic and Operational Spending: Operational costs keep the business running. Strategic spending supports growth. Each needs its own budget and controls.
Prioritize High-Return Activities: Direct your resources toward marketing efforts, tools, or hires that measurably improve performance.
Plan for Reserves: Profitable businesses still face disruptions. Create a reserve fund to ensure that a single bad month doesn’t derail your long-term plans.
Improve Your Cash Flow with Invoice Factoring
Delayed revenue can make it difficult to follow through on plans or act on opportunities, both of which impact profitability. Invoice factoring from Charter Capital gives you access to working capital by accelerating payment on your outstanding invoices. To learn more or get started, request a complimentary rate quote.
When people hear the terms “surplus equipment” or “unused equipment,” they often think of large, obvious assets, such as trucks parked for weeks or months on end, cranes that are no longer in rotation, or outdated production lines that are gathering dust. But surplus equipment shows up in more subtle ways across different industries. In this guide, we’ll walk you through how to identify if you have an issue, why it’s essential to take action if you do, and tips for managing surplus equipment to help keep your company financially strong.
What Surplus Equipment Really Looks Like
Surplus equipment isn’t limited to idle or broken pieces. Sometimes it’s items that are underperforming, misallocated, or no longer aligned with your current operations. Knowing how to spot it in your organization is the first step toward rectifying the situation.
Vehicles without Regular Routes or Assignments
These can include trucks, cargo vans, trailers, or service vehicles that remain road-ready but spend more time parked than deployed.
Tools or Machinery That Rarely Leave Storage
These may still be functional, but if you cannot recall the last time they were used, they’re likely not contributing to your current operations.
Technology That is No Longer Actively Assigned
Devices like laptops, tablets, or phones often pile up after turnover or upgrades, especially when no one is specifically assigned the job of managing them.
Production Equipment Tied to Past Work
This includes items such as molds, specialized tooling, or machines that were built around processes you no longer use.
Marketing or Presentation Gear That Stays Packed Up
Displays, banners, lighting kits, and other portable setups often go untouched between events or after strategy pivots.
Extra Equipment from a Shift in Headcount or Space
When your team size or footprint changes, it’s common for leftover equipment to sit unused without being formally retired.
How Surplus Equipment Affects Your Financial Health
Keeping surplus equipment isn’t always the wrong move, but it does have financial tradeoffs. If you’re not tracking those, you might be carrying unnecessary costs or missing better uses of your capital.
Tied-Up Capital
Equipment often represents a significant upfront investment. If it’s not producing revenue, you are losing out on returns that could be used elsewhere.
Hidden Operating Costs
Costs to hold equipment don’t stop just because you’re not using it. You may be paying for things like storage, maintenance, insurance, compliance, or even IT support on an ongoing basis. This can drain your cash flow and make it harder to cover essential expenses. Considering that three out of five small businesses say they struggle with cash flow challenges, and three in ten say they’ve been unable to cover crucial expenses like payroll and vendor payments, per Intuit surveys, it’s a major concern.
Balance Sheet Bloat
Surplus equipment still appears on your balance sheet, even if it’s not helping your business earn money. That can make your return on assets look low, which is a red flag for lenders and investors who want to see that you’re using resources effectively.
Depreciation without Utility
Equipment continues to lose value when idle. If it depreciates to the point where resale is no longer viable, you lose the opportunity to recover some or all of the cost.
Lost Opportunity
Most importantly, every dollar tied up in underused equipment is a dollar not being invested in growth. More than half of all small businesses have lost $10,000 or more because cash flow prevented them from accepting a project or sale, Intuit surveys show.
Quick Guide to Managing Surplus Equipment
At this stage, you likely have an idea of which unused assets are holding your business back and how they’re impacting you financially. It’s time to take action.
Step 1: Take Inventory of What You Actually Have
The first step of surplus asset management is listing all equipment that is no longer in regular use. This includes machinery, vehicles, tools, and technology. The objective here is to create visibility and identify items that may no longer support current operations, so a simple spreadsheet is often sufficient. Many businesses turn this and later steps into a collaborative effort and build a spreadsheet in Google Sheets or similar, so that everyone is working with the same document in real time.
Step 2: Assess the Value of Your Assets
Once you have a complete list, assess each item for both market value and usefulness within the business. Consider factors such as condition, age, and how well it aligns with the current operations. Some assets may be worth keeping if they can be reassigned, serve as backups, or support new initiatives.
Step 3: Explore All Your Options
Determine the best way to offload items with no remaining internal use. A few popular methods are covered below.
Repurposing Equipment: Equipment repurposing may be an option if you can use the item for a different internal function, training, spare parts, or overflow capacity.
Equipment Resale Strategies: Selling unused assets allows you to recover some or all of the value by listing the item through equipment marketplaces, auction platforms, or industry brokers. You can also work with specialized equipment liquidation companies to move things quickly.
Donating Items: Provide useful assets to nonprofits, schools, or vocational programs, and consult your accountant to document any potential tax benefit. Recycling or Disposal: For outdated or unusable equipment, pursue responsible recycling or certified disposal services to manage waste appropriately.
Step 4: Address Working Capital and Cash Flow in the Interim
If you’re experiencing symptoms like cash flow issues or a lack of working capital while working through the process, identify ways to smooth things out. For instance, if you issue B2B invoices, invoice factoring can accelerate those payments. Rather than waiting for your client to pay, you sell your invoices to a factoring company at a slight discount and receive most of the value right away. This method provides upfront cash to cover expenses and doesn’t create debt.
Step 5: Document What Leaves Your Business
Accurate documentation paves the way for comprehensive financial reporting and regulatory compliance. Keep detailed records of each asset’s final status, including resale receipts, donation letters, internal transfer notes, or disposal confirmations.
The Rise of Surplus Buying: Who’s Buying and Why It Matters
Surplus buying isn’t just an opportunity for buyers—it’s also a strategic solution for organizations managing their own surplus. When businesses actively participate in the secondary equipment market, whether as sellers or buyers, they support a circular economy that reduces costs, minimizes waste, and extends the useful life of assets.
For sellers, surplus buyers are essential. Startups, nonprofits, and local businesses often seek cost-effective alternatives to brand-new equipment—purchasing used office furniture, packaging tools, commercial kitchen assets, and more. Their demand helps organizations offload unused equipment faster and at better prices, transforming idle assets into working capital.
By listing surplus assets on platforms like SAM Auctions or SAM Marketplace, companies tap into this growing buyer pool. These platforms connect sellers with qualified buyers, accelerating sales and increasing recovery value. With the help of surplus management software, businesses can also streamline the process, track inventory, and optimize their overall asset management strategy.
In short, buying is a strategy because it fuels the marketplace sellers rely on—making surplus management faster, more sustainable, and financially effective.
The Role of Consignment in Smarter Surplus Liquidation
Consignment is an increasingly valuable part of the surplus management process for organizations with surplus property, such as furniture, fixtures, and equipment (FF&E), or processing equipment. Instead of managing a direct sale, business owners can work with third-party partners to sell assets on their behalf, often generating better returns with less internal effort.
This method is ideal for businesses aiming to manage their surplus more efficiently while supporting sustainability efforts. It helps reduce holding costs, frees up increased storage, and allows for responsible and sustainable handling of surplus materials. For those in procurement or operating a formal surplus property program, consignment can extend the lifecycle of assets while promoting sustainable surplus strategies.
Pairing consignment with surplus management software or a broader asset management program improves tracking and reporting, especially when managing diverse resources like refrigeration and FF&E. Consignment helps streamline how you manage, transfer, or retire surplus equipment.
This approach aligns with broader goals around implementing sustainability and ensuring the best use of resources, all while optimizing outcomes in equipment management and long-term equipment sales.
Strengthening Business Operations Through Surplus Management
Surplus management is more than just a cleanup exercise. It’s a proactive strategy that enhances operational efficiency and supports smarter business decisions. When businesses build surplus oversight into daily operations, they gain:
Operational Clarity: A real-time understanding of available assets enables faster deployment, prevents workflow disruptions, and reduces downtime.
Procurement Efficiency: By tracking asset usage across departments or locations, businesses can avoid unnecessary purchases and ensure equipment is assigned where it delivers the most value.
Strategic Flexibility: With fewer resources tied up in unused equipment, leadership can respond more quickly to market changes, scale initiatives, or reallocate space and staff.
By shifting surplus management from a reactive task to a routine operational discipline, businesses strengthen their ability to adapt, grow, and optimize resources across all functions.
Making the Right Call: Choosing the Best Path for Surplus Equipment
With multiple options available—resale, redeployment, donation, recycling, or consignment—choosing the best course of action for surplus equipment comes down to balancing value recovery, internal needs, and sustainability goals. To make the most of each decision, businesses should:
Evaluate Cost vs. Recovery: Consider whether the asset’s market value justifies resale efforts or if donation or recycling offers a better return in goodwill or efficiency.
Assess Internal Use Potential: Before offloading, ask whether the asset can be repurposed, reassigned, or held as a backup. For multi-site operations, internal redeployment may save future costs.
Prioritize Speed vs. Return: If cash flow is tight or storage is limited, faster options like consignment or liquidation may be preferable to longer resale cycles.
Align with Sustainability Goals: Recycling, donation, or resale to mission-aligned buyers can reduce environmental impact and support CSR initiatives.
By applying a consistent framework to surplus equipment decisions, businesses ensure each asset is managed with maximum impact—financially, operationally, and ethically.
Why Businesses Are Modernizing Equipment Transactions
Traditional surplus processes can be slow and fragmented. More organizations are turning to digital platforms and surplus management software to:
Increase Visibility of Equipment Inventory Across Locations: Ensure teams have real-time access to asset data to improve coordination and avoid redundant purchases.
Accelerate Transactions by Connecting Directly with Qualified Buyers: Use digital platforms to shorten sales cycles and improve cash recovery speed.
Maximize Recovery Value Through Competitive Bidding Environments: Leverage auctions and marketplaces to drive up final sale prices and reach a wider buyer base.
Streamlined digital processes free up working capital sooner, allowing businesses to reinvest in new projects, equipment, or technology with fewer delays.
Embedding Surplus Management Into Financial Planning
Rather than treating surplus equipment clean-up as a one-time task, you can incorporate surplus management into your broader financial strategy. This shift enables:
Proactive Budgeting: Plan for asset reviews and potential liquidations as part of your annual or quarterly budgeting to ensure smoother cash flow and fewer surprises.
Lifecycle Forecasting: Align your equipment purchases, maintenance, and retirements with long-term financial goals to improve capital planning and avoid overextension.
Operational Agility: When you integrate surplus management into your financial reviews, you can quickly reallocate funds from underused assets to meet shifting priorities or seize growth opportunities.
Stronger Governance: Treat your equipment as a strategic asset to improve accountability, simplify audits, and strengthen decision-making.
Embedding surplus management into your planning cycles ensures it’s not just about cutting losses—it’s about optimizing how you use capital and aligning your assets with business strategy.
Long-Term Solutions to Prevent Equipment Overstock
To stay efficient long-term, you’ll need to develop systems and habits that prevent unnecessary accumulation.
Implement an Equipment Tracking System
Whether you choose spreadsheets or asset-tracking software, the goal is the same: maintain a clear record of what you own, where it is, and how often it gets used. This will help prevent duplicate purchases and help you make smarter use of existing equipment.
Build Regular Equipment Reviews into Operations
Establish a cadence for reviewing equipment use, such as quarterly, semiannually, or as part of your budgeting and planning cycles. This will help you catch unused assets early and reinforce a habit of evaluating need before acquiring more.
Apply a Lean Approach to New Equipment Purchases
Before bringing in new equipment, ask whether the task can be handled with existing resources. Leasing, renting, or repurposing may be more cost-effective. Make this a standard part of your decision-making process to keep your business more flexible and reduce long-term clutter.
Tie Equipment Purchases to Expected Return
Treat equipment as a strategic investment. Set clear expectations for how it will contribute to revenue, efficiency, or capacity. If the value is unclear or the asset is not likely to be fully utilized, it may not be the right time to buy.
Get the Capital You Need While Managing Surplus Equipment
Depending on the strategy you use to offload your unused equipment and how selective you are about ensuring you receive top dollar for it, it can take months or even years to have it fully moved. During this time, cash flow management can become especially challenging. Invoice factoring is an ideal solution for many companies because it doesn’t create debt, and you stay in control of when you factor and which invoices you leverage. This allows you to factor selectively to fill gaps as needed and hit the brakes as soon as your equipment sells. If you’d like to explore the fit for your business, request a complimentary rate quote.
You probably didn’t mean to overstock. Maybe you were preparing for a surge in demand, a customer delayed a large order, or your procurement team was trying to lock in better pricing. Surpluses have a way of sneaking up on businesses and holding working capital hostage. But, that doesn’t mean you’re going to be stuck in a rut forever. In this guide, we’ll walk you through proven excess inventory management strategies and how to ensure your business stays liquid while you smooth things out.
Subtle Signs Your Business Has Too Much Inventory
Sometimes it’s really obvious that you’re holding too much inventory. For instance, if your warehouse or storage space is bursting at the seams, you probably identified the problem quickly. However, other times, businesses identify that they have a surplus based on the symptoms. Let’s take a quick look at a few examples.
Inventory is Not Moving in Line with Project Timelines
Delays, cancellations, or shifting priorities can leave you with stock that is no longer aligned with your production schedule.
Customer or Project Delays: You are holding raw materials or completed units beyond their expected use date because timelines have changed.
Idle Stock from Cancelled Orders: Inventory originally earmarked for a specific contract is now sitting unused.
Cash Flow Feels Tight, Even Though Receivables Are Strong
When capital is trapped in unsold or unused materials, it limits your ability to operate, even if your customers are paying on time.
Increased Dependence on Outside Funding: You are leveraging loans or lines of credit more often to cover normal operating costs.
Strained Vendor Relationships: Payment delays are occurring because funds are tied up in inventory rather than being available as cash.
Materials Are Aging or Degrading
Certain materials have shelf lives, while others can lose relevance if customer requirements or industry standards shift.
Shelf Life Concerns: Chemicals, fluids, or temperature-sensitive supplies are at risk of becoming unusable.
Obsolescence Risks: Materials that no longer meet specifications may need to be sold at a loss or written off entirely.
Production Has Slowed Due to Inventory Imbalance
Having inventory on hand does not always mean you have the right inventory.
Mismatch Between Inventory and Demand: Your team is waiting on certain components, while others pile up unused.
Increased Downtime: Jobs are stalled, not because of a lack of materials overall, but because of gaps in what is actually needed.
How Excess Inventory Hurts Your Business
At first, it might not feel like a crisis. A full warehouse can even look like a sign of health. However, when inventory levels go unchecked, the effects start showing up in places you may not immediately connect back to overstock.
Restricted Agility During Shifts in Demand
In industries driven by contracts, market cycles, or project-based work, speed matters. If too much capital is tied up in the wrong materials, you lose the ability to respond to new opportunities.
Slow Reaction to New Orders: You cannot take on new business because you need to clear out materials that no longer fit or because you cannot afford to start more work while your capital is tied up in excess inventory.
Delayed Equipment Servicing or Maintenance: If your storage facilities are overfilled, other parts of your operation often get pushed aside.
Operational Efficiency Drops
Extra inventory means more warehouse management, more movement, more checking, more tracking, and more room for mistakes. Even if your storage is organized, the overhead of managing unused stock adds friction to every task.
Longer Fulfillment and Prep Times: Crews spend more time locating what they need or stepping around what they don’t.
Workarounds Become the Norm: Temporary shelving, off-site storage, or shifting production space just to house inventory can drag down your entire workflow.
Decision-Making Becomes Reactive
Rather than leading with demand or project planning, your business starts bending around the inventory problem. It’s a dangerous shift because it means the excess is now dictating your strategy.
Purchasing Power Gets Thrown Off: You stop buying what you need because the optics of full shelves make it harder to justify new orders, even if they’re more aligned with your current work.
Sales and Production Get Misaligned: Teams may feel pressure to move product or use materials just because they’re already in stock, even if they’re not ideal for the task at hand.
Access to Credit and External Funding Reduces
Lenders care how quickly your business converts work into cash, and inventory does not count as working capital.
Lower Perceived Liquidity: Even if your balance sheet looks strong, you may be seen as cash-poor if your inventory is not moving.
Tighter Credit Limits: If excess inventory slows your ability to work or revenue, your access to funding may shrink, which can make it even harder to break the cycle.
Margins Quietly Shrink Over Time
Carrying too much inventory leads to slow financial leaks, such as rising insurance premiums, increased energy costs, administrative overhead, and loss from shrinkage or obsolescence.
Inventory Write-Downs: When items become unusable, that loss often hits your bottom line directly.
Strategic Ways to Reduce Excess Inventory
If you’re holding too much inventory, your first instinct might be to offload it fast, but the smarter move is to take a step back and approach it systematically by applying inventory optimization strategies.
Start with an Inventory Audit
Get clarity before you begin leveraging any new inventory optimization strategies. Start by getting the full picture of what’s in storage, where it’s located, and how it aligns with your current and upcoming needs.
Segment by Usability: Identify which items are still relevant, which are aging or obsolete, and which have no clear purpose tied to upcoming projects.
Match Against Demand: Compare your current inventory to active contracts or forecasted jobs. Anything without a clear use case in the near future is a candidate for action.
Stop Reordering Automatically
Many companies overstock by habit. If you set reordering thresholds too high or fail to adjust them during a slowdown, you can easily double your inventory before anyone realizes what happened.
Pause Standing Orders: Put a temporary freeze on automatic purchasing for anything that’s not moving.
Review Forecast Assumptions: Adjust your planning models to reflect actual current demand, not last quarter’s projections.
Bundle or Repackage Inventory
Sometimes the raw materials or partial builds you’re sitting on can be reworked into something more viable. This is especially useful for manufacturers with excess components or semi-finished goods.
Consolidate into Kits: If individual parts are hard to move, consider bundling them into kits for service, repair, or sale.
Convert into Alternate SKUs: Repackage or rebrand materials for different applications if the market allows.
Identify Secondary Channels
Even if materials aren’t moving within your primary business model, it doesn’t necessarily mean they’re worthless. There may be aftermarket, regional, or international buyers who can use what you can’t.
Resell Through Industrial Surplus Platforms: For example, companies like Aucto and HGR specialize in buying and reselling surplus equipment, components, and manufacturing inventory.
Explore Contractor or Subsupplier Needs: Smaller players may have demand for overstock at negotiated rates.
Involve Operations in the Plan
Loop your operations team in. They know what’s needed, what’s viable, and where hidden overstock is likely to be stored.
Create a Cross-Functional Team: Bring together purchasing, production, logistics, and finance to review the strategy.
Set Specific Reduction Goals: Treat it like a project with clear targets rather than a quick cleanup.
Track Weekly Progress
Inventory reduction is easy to deprioritize once work picks back up. To avoid this, layer in accountability.
Assign Ownership: Make a specific person responsible for driving the process and reporting results.
Watch Key Metrics: Inventory turnover rate, carrying cost, and space utilization can be used as indicators of progress.
How to Maintain Liquidity While Reducing Overstock
Your stock level reduction strategy will take time. Unfortunately, your payroll, vendor obligations, and new projects will not wait for you to clear the shelves. Free up cash during the process wherever possible without making shortsighted cuts that can hurt your long-term capacity.
Slow Spending without Stalling Operations
It’s tempting to implement blanket spending freezes when cash feels tight, but doing so can hurt productivity, delay new orders, or damage supplier relationships.
Audit Discretionary Spending: Look for expenses that don’t support current output or won’t help clear inventory.
Leverage Supplier Discounts: If your vendors offer early payment or volume discounts, explore ways to take advantage of them.
Negotiate Short-Term Terms with Vendors
Vendors are often more flexible than businesses expect, especially when it comes to long-term buyers.
Extended Terms: Ask for temporary extensions or payment deferrals on outstanding orders.
Smaller, More Frequent Orders: Shift to leaner procurement cycles to avoid adding to overstock.
Avoid Long-Term Loans and Credit Lines Unless Necessary
Be cautious about taking on traditional loans or leveraging your credit lines.
Weigh the Risks: Traditional loans are often slow to close, hard to qualify for, come with strict terms, and can drain resources with ongoing payments. Meanwhile, credit lines can be challenging to pay off and come with hefty ongoing interest payments.
Consider Alternatives: Rather than borrowing money you have to pay back, explore other funding solutions, such as invoice factoring.
Accelerate Cash Flow with Invoice Factoring
If you have unpaid invoices from B2B customers with strong payment histories, turn them into working capital with invoice factoring, also referred to as accounts receivable factoring. With factoring, you sell your invoices to a factoring company, also called a factor, at a slight discount and get most of the value right away. When your customer pays the invoice on their normal terms, you receive the remaining sum minus a small fee for the service.
Boost Liquidity During Cleanup: Factoring can accelerate cash flow while you’re handling excess inventory management. Use it to ensure you have cash on hand to cover ongoing needs, so your surplus doesn’t slow your growth or cause lasting damage.
Maintain Momentum: Once your cleanup project is complete, continue working with your factoring company as needed to cash in on easy payment and volume discounts with suppliers and ramp up as needed to accept large orders.
Streamline Excess Inventory Management with Charter Capital
“If you’re starting a business and you take out a loan, you’re a moron,” Shark Tank investor and long-term entrepreneur Mark Cuban says. While his words may come across as harsh or even crass, he goes on to make a fair point: “There are so many uncertainties involved with starting a business, yet the one certainly that you’ll have to have, is paying back your loan.” This is an area that trips up many startup founders and even causes people to pull money out of their own pockets to fund their business. But, there are ways to fund your new business without using personal funds and without taking out a loan. Two primary options are venture capital (VC) and factoring for startups. Below, we’ll walk you through how they work and why factoring is often the more suitable alternative.
Why Business Financing is Vital for Startups and New Businesses
Virtually all businesses require external capital at some point. However, because startups aren’t running at full speed just yet and their revenue has not stabilized, their capital needs are often much greater than established businesses.
Finance a Startup: Covering Initial Operating Costs
Two in five startups that fail simply ran out of cash, CNBC reports. While it’s easy to say this comes down to poor financial management, costs such as product development, marketing and advertising, and administrative expenses can add up. Many startups tap into funding solutions to cover everyday expenses until revenue picks up.
Using Business Financing to Scale a Startup Business
Once the business takes off, the next step is scaling. While this naturally involves increasing expenses related to raw materials or equipment that require capital, startups often find themselves in need of larger facilities and technology to help manage rapid growth. In these cases, business growth funding allows the startup to scale without cutting corners.
Bridge Cash Flow Gaps and Build a Cushion
Cash flow solutions are often vital for startups and established businesses alike, especially those that serve other businesses. This happens when the business invoices customers after work or goods are delivered, then waits weeks or months for an invoice to be paid.
Attract and Retain Top Talent
Startups have to work especially hard to attract and retain talent. While some do this by offering shares of the company, others seal the deal with competitive salaries, hiring bonuses, and perks. This, paired with the costs of finding and onboarding talent, can add to the financial load.
Venture Capital Explained
VC is a type of funding that fuels startups with high growth potential. Around $171 billion is awarded in VC each year, Statista reports. However, funding is down in recent years, with the U.S. showing nearly a 30 percent decline, according to InvestmentNews. Industries like tech, healthcare, and renewable energy, where rapid scaling and large returns are expected, tend to get the most attention from venture capitalists.
Unlike loans or other financing options, VC does not require repayment. Instead, investors provide capital in exchange for equity. In other words, they own a portion of your business. However, this also means they’re usually bringing expertise, mentorship, and connections to your startup in addition to cash.
How Venture Capital Works
VC is very different from other alternative funding solutions, and the full process can take anywhere from around three to six months.
1. Pitch
Startups usually pitch their business to VC firms or angel investors. You’ll need to present a clear value proposition, a detailed business plan, and evidence of market demand and growth potential.
2. Due Diligence
If the VC firm is interested, they’ll dig into your business. This includes analyzing your financials, performing market research, evaluating your team, and doing competitor analysis.
3. Investment
Once they’re satisfied, the firm will provide funding in exchange for equity. There’s usually some negotiation during this stage.
The funding is often released in stages, referred to as rounds, that are tied to milestones. Common rounds include:
Seed Funding: Generally speaking, seed funding should last your business 12 to 24 months and helps you get your business off the ground. An average deal will be in the neighborhood of $3.5 million and the investor will receive anywhere between 15 and 35 percent of your company’s equity in exchange.
Series A, B, and C: Subsequent rounds, including Series A, B, and C, each provide a business with anywhere from 12 to 18 months of cash. These phases are designed to help the business scale operations, enter new markets, or develop new products. Deals can provide the business with anywhere from around $20 million to $60 million or more, with each round taking anywhere from roughly ten to 30 percent of the company’s equity.
4. Active Involvement
VC firms often take an active role in your company. They may be involved in decisions, help you scale, build partnerships, and even help you navigate exits like IPOs and acquisitions.
How Startup Business Owners Can Qualify for Venture Capital
Roughly 98 to 99 percent of businesses that request venture capital are denied, Forbes reports. This is because VCs have rigid requirements like those outlined below.
A Disruptive Idea: Your product or service must solve a significant problem or address an unmet market need.
Scalability: Your business must be poised for rapid growth. VCs also want startups that can scale exponentially, not just incrementally.
A Strong Team: Your leadership team’s experience, resilience, and vision are critical. VCs invest as much in people as they do in ideas.
Traction: While early-stage startups can secure funding, VCs often want proof of traction, such as customer growth, revenue, or partnerships.
Benefits of Venture Capital for Startups
There are a few benefits that set VC apart from other types of funding.
Large Sums of Money: VCs can provide millions of dollars, enabling businesses to grow rapidly and enter markets.
Strategic Expertise: VCs often have industry expertise and provide mentorship, which can help shorten the learning curve and help you avoid issues.
Networking Opportunities: VCs can connect you with other investors, customers, and business partners, which can facilitate growth.
No Immediate Debt: Since VC funding isn’t a loan, there are no monthly payments or interest to worry about.
Drawbacks of Venture Capital for Startups
Despite the benefits, VC comes at a cost.
Loss of Control: Giving up equity means investors have a say in major decisions. Some VCs even require a seat on your board of directors.
High Expectations: VCs prioritize rapid growth and high returns. This can make startup founders feel pressured to scale faster than they’re ready and force them to make decisions that prioritize investor return on investment (ROI) over long-term sustainability or values.
Rigorous Qualifications: The application process is lengthy and competitive. Many startups spend months pitching without success.
Equity Dilution: The more funding rounds you go through, the smaller your ownership stake becomes. If your company eventually sells, your payout may be significantly reduced.
Invoice Factoring Explained
Invoice factoring is a type of funding that’s popular with businesses that serve other businesses, especially those that invoice and offer lengthy payment terms. The total U.S. market size is valued at roughly $172 billion annually, according to Grand View Research.
Like venture capital, factoring does not require the business to take on debt. However, instead of giving up equity in exchange for capital, you sell your unpaid invoices to a factoring company for immediate cash.
How Invoice Factoring Works
The factoring process is simple and straightforward. Depending on your level of preparedness and the factoring company you choose, your business can be approved and receive cash in just a day or two.
1. Submit Your Invoice
You provide your factoring company with an unpaid client invoice. The factor then assesses its value and the creditworthiness of your client.
2. Receive Your Advance
Once approved, the factor sends you money immediately. This advance is usually between 70 and 90 percent of the invoice’s value, though it can be more or less depending on factors like your industry and the creditworthiness of the client. The remaining balance is held as a reserve.
3. Receive Your Reserve
Your client pays the factoring company when the invoice is due based on the terms you’ve set with your client. Once the invoice is paid, you receive the reserve, minus a small fee for the service.
How to Qualify for Factoring
One of the best things about factoring is that it’s relatively easy to qualify for compared to traditional loans or venture capital. Let’s review what factoring companies typically look for.
Creditworthy Clients: Since repayment depends on your clients, factoring companies focus on their ability to pay invoices on time rather than your credit score.
Invoice Validity: The invoices you factor must be legitimate and free of disputes.
Industry Fit: Factoring is especially common in industries like trucking, manufacturing, and staffing, where payment delays are common.
Consistent Revenue: Startups can qualify, though you’ll usually need to have been in business for a few months and have steady invoicing.
Benefits of Factoring for Startups
The unique way that factoring works means it comes with a wealth of benefits for startups.
Easy Approval: Factoring doesn’t require stellar credit or years of financial history.
Fast Cash Flow: Factoring typically pays out in one or two business days. However, when you partner with a factoring company like Charter Capital, you can qualify for same-day funding. This makes it ideal for businesses with urgent cash flow needs.
No Debt: Because factoring is not a loan, it doesn’t add to your liabilities or hurt your credit score.
Flexible Terms: Use factoring as a one-time solution or on an ongoing basis. You can factor invoices as needed.
Drawbacks of Factoring for Startups
While factoring has many benefits, there are some things businesses should be aware of before signing up.
Cost: A typical factoring fee can be anywhere from one to five percent of an invoice’s value. While this is a small amount, it’s important to approach it responsibly and ensure you’re receiving ROI.
Client Interaction: Your factoring company will likely have contact with your clients when verifying invoices and collecting. Be sure to partner with a factor that has a good reputation and a strong sense of professionalism.
Limited to Invoiced Businesses: Factoring is only an option for companies that invoice clients for services or products after delivery.
Client Risk: If your clients have poor payment habits, the factoring company may offer terms that reflect the increased risk or decline to factor their invoices.
Key Differences Between Invoice Factoring vs. Venture Capital
When it comes to funding your startup, both VC and factoring offer unique advantages. Let’s take a look at how they stack up.
Ownership and Control
VC requires you to give up a portion of your equity, which means sharing decisions with investors. Factoring does not. If maintaining control of your business is important to you, factoring is the better solution.
Factoring vs. Bank Loan: Which Provides Faster Funding?
From pitch to funding, it takes months to see cash from VC. Conversely, factoring can provide funds right away. If your startup needs funding now or within the next 90 days, factoring comes out on top.
Eligibility and Requirements
VC firms are very selective and look for rapid growth potential. Factoring companies focus on your clients’ ability to repay their invoices. If you’re in a consumer industry or poised for exponential growth, VC might work for you. If you operate a B2B business, factoring will be more accessible.
Cost
While VC doesn’t require repayment, it still comes at a cost—equity in your business. Conversely, factoring comes with a small fee. It’s a transparent and manageable cost that doesn’t impact your long-term profitability. If keeping profits within your business matters more than raising large sums, factoring offers better value.
Purpose of Funding
VC is ideal for large-scale, high-risk initiatives like R&D, market expansion, or launching a disruptive new product. Factoring is designed to address cash flow issues. It’s well-suited for things like payroll, purchasing inventory, or managing day-to-day expenses while you wait for clients to pay.
Long-Term Impact on Your Business
While VC can bring mentorship and networking opportunities, the pressure to grow quickly and deliver high returns can lead to risky decisions that may harm your business in the long run. Factoring, on the other hand, provides funding without influencing your strategy. You can grow at your own pace without external pressure.
Understanding Factoring Rates: What Startups Need to Know
Factoring rates determine how much factoring companies charge when purchasing outstanding invoices from a business. These rates typically range from one to five percent of the invoice amount, depending on factors such as invoice value, industry risk, and client creditworthiness. Unlike a startup business loan, which requires scheduled repayments, invoice factoring for startup companies provides immediate cash flow without adding debt.
There are two primary types of factoring agreements: recourse factoring and non-recourse factoring. With recourse factoring, the business is responsible if a client doesn’t pay their invoice, whereas in non-recourse factoring, the factoring company assumes the risk—but at a higher cost. Startups should weigh the benefits of non-recourse factoring agreements against their higher factoring rates to determine the best fit for their needs.
Beyond the percentage of the invoice value deducted as a fee, some factoring companies charge additional costs for same-day funding, credit checks, and transaction processing. Comparing multiple factoring partners helps startups secure lower factoring fees while ensuring a factoring agreement that aligns with their business funding needs.
Unlike a loan or line of credit, invoice factoring provides fast access to cash by unlocking funds tied up in unpaid invoices, allowing startups to reinvest in operations and growth. Understanding the cost of factoring ensures startups can use invoice factoring effectively as a financing solution without unexpected expenses.
Find the Best Startup Factoring Solution for Your Business
If your startup requires funding and traditional financing, and VC don’t align with your needs, factoring may be the accessible solution you’re looking for. With decades of experience supporting growing businesses and competitive rates, Charter Capital can help you bridge cash flow gaps and build a stronger company without taking on debt. To explore the fit more, request a complimentary rate quote.
“’Tis skill, not strength, that governs a ship,” historian Thomas Fuller wrote centuries ago, yet the wisdom carries through today, especially in business. Just like a captain navigating unpredictable waters, your business success depends on the skills you master, not just the strength of your company’s offerings or the time you put in. Effective financial management is the helm of your “ship,” and therefore, developing and improving essential financial skills is crucial to navigating uncharted waters and challenging situations.
In this guide, we’ll walk you through the importance of building essential financial skills and key areas to focus on, plus provide actionable tips for getting started.
Why Developing Small Business Financial Management is Essential
Before we break down essential financial skills for business leaders, let’s take a quick look at some of the reasons upskilling must be a priority.
The Face of the Entrepreneur is Changing
Launching a new business has historically been a very mindful decision. It was the ultimate goal. Hopeful entrepreneurs would study as much as they could and take roles with other entrepreneurs as a way to build skills. In fact, nearly half of all Boomers running a business today launched it as their only initiative, Xero surveys show. Conversely, 67 percent of Gen Z entrepreneurs began their businesses as a side hustle. Although this allows more time to ensure the business is viable before going full force, it also means most new business owners are learning as they go. When it comes to financial management, there’s a big learning curve to overcome—one that can be difficult to address when you’re managing countless other aspects of running a business for the first time.
Financial Literacy is Declining
Financial literacy is fairly low in the U.S. The average person answered just 48 percent of questions correctly in the annual 3 TIAA Institute-GFLEC Personal Finance Index (P-Fin Index). This marks a steady decline from the peak score of 52 percent in 2020. Business owners are in the same boat, with little more than half rating their financial literacy as “high,” per Xero.
Few Small Businesses work with Financial Planning Pros
Despite a lack of personal knowledge, just 15 percent work with an accountant or advisor, Xero reports. Nearly two in five still manage financial matters on their own. This, unfortunately, means that most business financial matters are managed by someone without the ability to do so effectively.
The Hidden Costs of Poor Financial Planning and Financial Literacy
Poor financial planning quietly erodes business stability, leading to cash flow shortages, excessive debt, and tax liabilities that hinder growth. Without strong financial reporting and forecasting, business owners risk misallocating resources, facing regulatory fines, and losing investor confidence. Instead of proactively managing finances, many find themselves constantly reacting to problems, which weakens long-term financial health.
A key driver of poor financial planning is a lack of financial literacy. Nearly half of small businesses struggle with financial challenges tied to inadequate financial knowledge, according to Xero. This knowledge gap costs them an average of $118,121, QuickBooks reports. To avoid these costly mistakes, businesses should strengthen their financial skills by working with professionals or certified financial planners. A solid understanding of financial trends, problem-solving, and analysis builds resilience, ensures compliance, and supports sustained profitability.
10 Essential Financial Skills for Business Leaders
Strong financial decision-making relies on a mix of analytical skills, communication skills, and a solid understanding of financial concepts. Business leaders must be able to interpret financial documents, assess financial challenges, and explain key financial insights to stakeholders in simple terms. Developing these skills not only improves financial planning but also strengthens problem-solving in complex financial situations. The case for building financial literacy as a business leader is clear. Next, let’s take a look at some of the areas people often struggle with and what to focus on if you’re ready to learn.
1. Tax Planning and Compliance
Optimizing tax strategies is the biggest challenge for small businesses, according to Xero surveys. Closing this gap is a tall order, considering less than half are even confident they’re paying taxes correctly, per QuickBooks.
Rounding out knowledge in this area starts with knowing the best business structures for tax and legal purposes. Choosing the right structure for your business helps you limit tax liabilities. However, your structure also impacts how you get paid, how your business and personal taxes are paid, and special requirements for managing your business, which makes it foundational in everything you do. With this step addressed, you can move into more advanced tax optimization strategies, such as planning your expenses and maximizing your deductions.
2. Bookkeeping
Bookkeeping encompasses the day-to-day tracking of your financial transactions, including payables and receivables. Because of this, it has a trickle-down effect and influences many of the other areas outlined here.
Many businesses fall into common bookkeeping mistakes, such as failing to separate personal and business expenses or overlooking proper expense tracking. These errors create unnecessary stress and can hinder your ability to monitor cash flow and assess financial performance effectively. Conversely, developing bookkeeping skills allows you to understand your company’s financial health and make informed financial decisions. It also helps you ensure the accuracy of your books and compliance with regulatory requirements.
3. Forecasting
Many business owners take a relaxed approach to financial forecasting by ballparking cash flow in or coming up with seemingly plausible sales projections in their heads. These things can somewhat work when a business is very small, but the accuracy quickly diminishes once more than the first few customers are acquired.
True financial forecasting—the type that becomes increasingly essential and complex as a business grows—involves analyzing historical data, market trends, and external factors to create informed projections for revenue, expenses, and cash flow. These insights allow you to anticipate challenges, allocate resources effectively, and identify opportunities for sustainable growth.
4. Business Budgeting
Budgeting is a fundamental skill for managing business finances, yet it’s the second most common struggle for business owners, according to Xero surveys. While many small businesses start with informal spending plans, the lack of a structured approach can make it difficult to align financial decisions with long-term goals.
By developing a business budget, you can create a clear roadmap for managing resources, controlling expenses, and planning for growth. A well-crafted budget ensures that every dollar has a purpose, helping you avoid overspending while prioritizing key investments. It also serves as a benchmark, allowing you to measure progress and adjust strategies as needed.
5. Financial Statement Analysis
One of the most important ways to improve your finance skills is by learning how to read key financial reports—income statements, balance sheets, and cash flow statements. These documents offer a clear view of your business’s health and help guide smarter, strategic decisions.
By analyzing this data, you’ll uncover trends, spot issues early, and gain valuable insights into your company’s financial performance. For example, profit and loss reports help manage expenses, while balance sheets support debt and asset planning.
You don’t need to be an expert. Start with the basics, stay updated, and take a course or work with a pro to develop your skills. Strong financial analysis, paired with excellent communication, empowers you to explain results clearly and align them with your business strategy.
6. Credit and Debt Management
Managing credit and debt is a key skill for keeping your business financially healthy. Learning how to build business credit can open the door to better borrowing terms and even lower insurance rates. This often starts with simple strategies, like making early payments instead of just paying on time, to demonstrate financial responsibility and improve your credit score.
It’s also important to recognize the difference between good debt vs. bad debt. Debt that helps you grow, like investing in equipment or inventory, can be an asset, but relying on high-interest loans for everyday expenses can quickly become a liability. By managing credit mindfully, you can secure the resources your business needs while avoiding unnecessary financial strain.
7. Cash Flow Management
Effective cash flow management is essential for keeping your business running smoothly, but it’s also one of the top challenges for business owners, according to Xero surveys. Without it, even a profitable business can struggle to cover day-to-day expenses or plan for growth.
Avoiding common cash flow management mistakes, like failing to monitor cash inflows and outflows regularly, can help you maintain financial stability. Additionally, improving accounts receivable processes, such as by implementing clear payment terms or following up on overdue invoices, can keep your cash flow consistent and predictable.
8. Strategic Cost Management
Strategic cost management focuses on analyzing your spending to ensure it supports your business goals. Rather than simply cutting costs, the process involves identifying inefficiencies, eliminating waste, and redirecting resources toward areas that offer the greatest value.
This could include renegotiating supplier contracts, streamlining operations, or reallocating funds to initiatives that drive growth. By carefully managing costs, you can maintain financial stability while positioning your business for long-term success.
9. Risk Management
Just 38 percent of small businesses have a reserve fund, and 13 percent don’t have a plan for handling unexpected expenses, according to Xero surveys. While these may seem like obvious needs for a business, the lack of implementation highlights deeper issues. Misperceptions about risk, barriers to putting safeguards in place, or competing priorities often push risk management to the back burner, especially for smaller companies.
Risk management skills empower you to identify potential threats to your business, assess vulnerabilities, and create strategies to address them. By learning to anticipate challenges and prepare for them, you can build a more resilient business and reduce the impact of unexpected events.
10. Funding Option Assessment
Understanding your funding needs and finding the right solution can make all the difference in keeping your business moving forward. Yet, when tested on borrowing knowledge, the average American scores just 59 percent, according to the latest P-Fin Index.
Funding option assessment requires a clear view of when financing is necessary, what options are available, and how they align with your goals. Whereas traditional financing may work well for long-term investments, it’s not always ideal for short-term needs or speed. It’s also out of reach for many small businesses due to stringent qualifications. Plus, it can lead to loan stacking, which can create a financial hole that’s difficult to climb out of. Credit cards create similar issues. If the balance isn’t paid in full immediately, interest can eat away at your profitability.
Because of this, options like merchant cash advances (MCAs) and factoring are often favored for their accessibility and speed, though MCAs can have APRs that reach into the thousands and have unpredictable payback speeds. Conversely, factoring allows you to turn unpaid invoices into immediate cash, providing flexibility without debt.
By learning to evaluate funding options, you can confidently choose solutions that support your business’s growth while avoiding unnecessary financial strain.
5 Quick Tips for Building Essential Financial Skills
Now that we’ve covered what you should know, let’s explore how to build up your acumen.
1. Leverage Business Accounting Software
While it’s important to understand the logic behind your financial metrics and know how to perform calculations, that doesn’t necessarily mean you need to do everything manually. In fact, automating processes helps ensure accuracy and speeds up processes so you can focus on strategies to improve your numbers.
Use accounting software to simplify financial management and keep your records organized. Tools like QuickBooks, Xero, and Wave help with tasks such as expense tracking, invoicing, and generating financial reports. They can also be great resources for learning more about your company’s financial health.
2. Work with a Pro
Pros can handle complex issues, like financial forecasting or navigating compliance, and even basic tasks, like bookkeeping, for you. If you don’t have experience in a certain area, working with a pro will allow you to ensure the job is done right and help you understand how things should be done. Consider hiring a CPA, bookkeeper, or tax expert, or financial consultant when something is outside your area of expertise or simply commands more of your time than you have to give. A good advisor will save you time, ensure you’re complaint, and help you avoid costly mistakes, which often more than covers any associated costs.
3. Map Out Priorities and Focus on One Area at a Time
Focus on one financial skill at a time instead of trying to learn everything at once. Start by identifying where your business needs the most improvement, such as cash flow, budgeting, or forecasting, and dedicate your energy there first. This approach makes learning feel manageable and helps you build confidence. As you improve, you’ll see the impact in your business and feel more prepared to move on to the next area.
4. Learn in the Way That’s Best for You
Find learning methods that suit your style. Hands-on learners might prefer workshops or online courses, while others may enjoy books, blogs, videos, or podcasts for quick insights. Audiobooks are perfect for busy schedules, too. You can listen during your commute or while exercising.
5. Fit Lifelong Learning into Your Routine
Turn financial education into a habit by working it into your schedule. Listen to a podcast while walking the dog, read a blog post over your morning coffee, or set quarterly goals to tackle new financial topics. The key is consistency. Small efforts add up over time. Keep learning part of your routine to ensure you’re always sharpening your skills and staying ready to tackle new challenges.
Improve Your Small Business Financial Management with Invoice Factoring
Virtually all businesses require capital at times. Shortfalls can happen due to seasonality, rapid growth, and unplanned expenses. A gap isn’t always a sign that your business is unstable, but how you handle that gap can make a world of difference in your company’s stability and growth.
Invoice factoring closes those gaps by providing instant payment on your B2B invoices, so you get immediate working capital and are freed from tedious tasks like chasing invoices. Plus, you can set up your factoring account and not factor any invoices until the need arises, ensuring your business is prepared even in uncharted waters or challenging situations. To take the next step, request a free Charter Capital rate quote.
Profitability slipping or cash flow feeling tight? One of the biggest culprits for small and growing businesses is overhead. By mastering the art of managing business overhead costs and using practical cost-saving strategies, you can boost your bottom line and create financial stability. On this page, we’ll walk you through the nuances of business overhead, why managing it effectively is so impactful, and cover some tips you can implement to start seeing results right away.
Business Overhead: Definition and Types
Before we break down how to reduce overhead expenses, let’s take a quick look at exactly what overhead is and why it’s key to improving profitability.
What Are Overhead Costs?
Overhead costs are ongoing expenses that support your operations but don’t generate revenue.
Common Types Overhead Expenses
Overhead costs can be categorized into production, administrative, selling, and financial expenses. Each plays a unique role in your business operations.
Production Overhead / Manufacturing Overhead
Production overhead, also referred to as manufacturing overhead, includes costs that are indirectly tied to producing goods or services. While they don’t include materials or labor, they’re essential for production. Being able to identify and isolate these expenses makes it easier to set accurate pricing and improve profit margins. Let’s take a quick look at some examples.
Equipment Maintenance: Servicing machines used in production.
Factory Utilities: Power and water used at a manufacturing site.
Depreciation: Gradual wear and tear on machinery or factoring buildings.
Supervisory Salaries: Payroll for production managers or quality control staff.
Factory Supplies: Tools, cleaning materials, and lubricants.
It’s worth noting that not all businesses will have production overhead. For instance, many service-oriented businesses, such as consultancies, security firms, or staffing agencies, won’t have these expenses because they don’t engage in manufacturing or product creation. If you’re in an industry that does not have production overhead, you’ll want to use terms like “operational overhead” or “project overhead” instead, as these will reflect costs that are indirectly tied to delivering your services. For instance, a staffing company would likely include recruitment tools, such as access to LinkedIn Recruiter or job board subscriptions, in these costs. Things like background checks and payroll management for temporary staff would also fit into this category.
Administrative Overhead
Costs related to running the day-to-day operations of your business are considered administrative overhead. These expenses are not tied to production or sales but are essential for keeping the business functional. Some examples are covered below.
Office Supplies: Common office supplies such as pens, paper, and software subscriptions for general use.
Salaries: Human resources, accounting, IT staff, and other salaries that impact the whole company.
Compliance Costs: Legal fees, licensing, and regulatory filings.
Selling Overhead
Costs that are associated with promoting or selling your products or services are considered selling overhead. These expenses support revenue generation and ensure your product reaches your audience and stays competitive in the market. They do not include the cost of goods sold (COGS). A few examples are highlighted below.
Advertising: This includes everything from social media campaigns to Google Ads and billboard rentals.
Sales, Salaries, and Commissions: Pay for sales reps and incentives for hitting targets or commission for referral partners.
Promotional Materials: Flyers, brochures, and branded giveaways.
Travel Expenses: For salespeople meeting with clients or attending trade shows.
Customer Relationship Management (CRM) Software: Tools to manage customer relationships and track sales pipelines.
Financial Overhead
Costs that are tied to the financial management of your business are considered financial overhead. These expenses don’t directly drive revenue or production but are critical for financial health. Effectively managing financial overhead keeps your borrowing costs low and improves cash flow. A few examples of financial overhead are covered below.
Loan Interest: Payments on loans or lines of credit.
Factoring Fees: Costs related to cash advances secured through invoice factoring.
Bank Fees: Charges for account maintenance or international transactions.
Accounting Services: Fees for bookkeeping or tax preparation.
Bad Debts: Money lost from customers who fail to pay.
Insurance: Coverage for assets like vehicles or accounts receivable.
Fixed vs. Variable Overhead Costs
Oftentimes, you’ll hear of an overhead expense being referred to as “fixed” or “variable.” It’s easier to manage them effectively when you evaluate these categories individually.
Fixed Overhead
A fixed overhead cost stays consistent regardless of how much your business sells or produces. These expenses are often predictable and unavoidable. Examples include rent or lease payments, equipment depreciation, and salaries of administrative staff.
Variable Overhead
A variable overhead cost fluctuates with your business activity levels. These expenses are more flexible and can provide opportunities to cut costs during slower periods. You’ll want to track them separately so that you can easily spot places to cut costs in slow months without impacting critical operations. Examples include office supplies, shipping costs, and temporary labor.
Direct vs. Indirect Overhead Costs
Another way to look at overhead is to determine whether the cost is directly tied to specific business activities or spread across the organization. Being able to split expenses into these categories is useful for cost allocation, especially if you’re budgeting for multiple projects or lines of business.
Direct Overhead
Expenses that are linked to a particular project, product, or department are considered direct overhead. Examples include rent for a dedicated manufacturing facility and maintenance of a specific machine used for production.
Indirect Overhead
Broader expenses that benefit the business as a whole are considered indirect overhead. Examples include utilities, office supplies, and salaries for your human resources department or accounting team.
Overhead Costs vs. Operating Expenses
The terms “overhead costs” and “operating expenses” are often used interchangeably, but they mean different things.
Operating Expenses
Operating costs include all expenses required to keep your business running every day. This is a broad category that encompasses both direct and indirect costs.
Direct Operating Costs: Expenses tied directly to producing goods or services, such as raw materials or direct labor.
Indirect Operating Costs: Expenses that are not tied directly to production but that are still essential for operations, such as rent, utilities, or administrative salaries.
Overhead Costs
Overhead refers specifically to indirect costs that support your business but aren’t directly tied to production or sales. It’s a subset of operating costs.
Why Overhead Management Matters for Reducing Business Overhead Costs
Effectively managing your overhead is crucial to maintaining a healthy and profitable business. Let’s take a quick look at the reasons behind this.
Your Protect Your Profit Margins
Overhead costs don’t directly generate revenue but they eat into your profits. By keeping them under control, you ensure your business remains profitable even when sales fluctuate.
Cash Flow Improves
Lower overhead means more cash is available for essentials like payroll, inventory, or growth supplies.
Operational Efficiency Increases
Streamlining overhead costs helps you eliminate waste and focus resources on what truly drives value for your business.
You Can Price Your Offerings More Competitively
A lean overhead structure allows you to price products or services more competitively without sacrificing profitability.
Financial Resilience Gets a Boost
Efficient overhead expense management prepares your business for unexpected challenges, like market downturns or rising costs.
Calculating and Benchmarking Overhead Costs
For most businesses, the goal is to keep overhead costs as low as possible without damaging quality or creating inefficiencies. But, you might wonder how you stack up to your peers. Are your operating costs normal? Do you need to keep chipping away at them or is it ok to divert your attention to other things for a while?
Measuring Overhead Costs
To understand where you sit, find out what percentage of your monthly sales goes to covering overhead using the following equation:
Monthly Overhead Costs ÷ Monthly Sales x 100 = % of Sales for Each Month
For instance, let’s say your monthly revenue is $250,000 and your overhead is $50,000. Your overhead rate is 20 percent.
Benchmarking Overhead Costs
Generally speaking, your overhead should be 35 percent or less of your total monthly sales. However, there are variances by industry and even within industries. For instance, a large trucking fleet might have an overhead rate of 25 percent, while an owner-operator might be closer to 20 percent. But, bear in mind this only reflects overhead costs. A typical trucking company has a profit margin just 2.5 to six percent, as Boss Magazine reports. Operating costs eat up the rest.
Meanwhile, manufacturing businesses tend to sit around 35 percent, Harvard Business review (HBR) reports. There are also some outlier industries. For instance, an SaaS company may be able to whittle their overhead rate down to five to 15 percent, while professional services firms often sit on the higher end of the spectrum, funneling 50 to 70 percent of their sales into overhead.
Understanding where your business fits on the spectrum can help you identify areas to optimize. For instance, low-overhead businesses will likely want to focus on scaling revenue and maintaining cost discipline, while high-overhead businesses should evaluate whether costs like office space or marketing align with their business growth.
9 Cost-Saving Strategies for Managing Business Overhead
Now that we’ve covered the basics of business overhead, let’s explore some overhead cost reduction tactics to leverage in your financial planning activities.
1. Review Overhead Costs Quarterly
Reviewing overhead costs regularly allows you to take a proactive approach to managing them. Perform quarterly reviews to identify trends, spot unnecessary spending, and make adjustments before costs spiral out of control.
For example, you might notice rising subscription fees for software you no longer use or excessive utility costs due to inefficient equipment. Addressing these issues promptly can save your business significant money.
A quarterly review also ensures your overhead aligns with revenue. If revenue dips, you can scale back on non-essential expenses like temporary labor. Conversely, during growth periods, you can invest in critical areas like new technology.
2. Review Contracts Regularly
Aim to review contracts at least annually. This will help ensure you’re getting the best value for services like leases, software, and vendor agreements. Over time, contracts may become outdated and you could end up overpaying or locked into unfavorable terms.
For instance, your internet provider may have introduced faster, cheaper plans, or a supplier could offer discounts for bulk orders. By revisiting contracts, you can renegotiate terms, seek competitive bids, or cancel unnecessary services.
Additionally, reviewing contracts ensures compliance and keeps your business protected. For instance, liability insurance may need adjustments as your business grows.
3. Manage Inventory Carefully
Careful inventory management minimizes overhead costs tied to storage, insurance, and obsolescence. Excess inventory can result in missed sales or production delays.
Implement strategies like just-in-time (JIT) inventory to order supplies only when need, reducing storage costs. Use inventory management software to track stock levels, identify slow-moving items, and forecast demand accurately.
4. Leverage Tech
Streamlining business operations through technology and automation can produce impressive savings. Tools like accounting software, CRM systems, and inventory management can replace time-consuming manual tasks and increase accuracy. Even small investments in tools that leverage artificial intelligence (AI) can make a major difference.
For example, automating payroll reduces the need for administrative staff, while scheduling software ensures optimal workforce allocation to avoid unnecessary labor costs.
Cloud-based tools also eliminate the need for costly physical infrastructure like servers, plus may allow teams to collaborate remotely and reduce office space needs.
5. Reduce Energy Consumption
Reducing energy usage is a simple yet impactful way to cut overhead costs. Start by auditing your energy consumption to identify inefficiencies. Replace outdated equipment with energy-efficient alternatives, such as LED lighting or ENERGY STAR-certified appliances.
Smart thermostats and motion-sensor lights can reduce waste even more by optimizing usage based on activity. For instance, adjusting HVAC systems to operate only during business hours can significantly lower utility bills.
Encourage energy-saving habits among employees, like powering down devices at the end of the day. If feasible, consider renewable energy options, such as solar panels, for long-term savings.
6. Go Paperless
A typical business saves more than $7,500 annually per employee by cutting out paper, according to Pearson research. Transitioning to a paperless system reduces overhead costs associated with printing, storage, and waste management. Switching to digital tools for invoicing, recordkeeping, and communication saves money on paper, ink, and office supplies, while also streamlining workflows.
For example, employees and clients adopt paperless practices by using tools like email for communication and electronic payments for billing. This reduces costs and also aligns with sustainability goals, which appeals to eco-conscious clients and partners.
7. Go Remote
Businesses can save over $10,000 per year per employee by going remote, Lemon.io reports. Adopting a remote work model, even partially, can significantly reduce overhead costs by cutting expenses like office space, utilities, and on-site amenities. With employees working from home, businesses can downsize or eliminate physical offices, saving thousands or more annually in rent and maintenance.
For example, a consulting firm that shifts to a fully remote model no longer needs to lease a downtown office, reducing overhead while maintaining productivity. Cloud-based tools and video conferencing software ensure seamless collaboration without needing to physically share the same space.
Remote work also offers flexibility to hire talent from lower-cost regions, reducing payroll overhead. Hybrid models, where employees only come in occasionally, further minimize costs while preserving a physical presence when necessary.
8. Cross-Train Your Team
Cross-training your employees helps reduce overhead by creating a more versatile and efficient workforce. When team members are trained in multiple roles, you can handle fluctuations in workload without relying on additional hires or temporary staff.
For example, during peak periods, an administrative assistant trained in customer service can step in to handle client inquiries, reducing the need for overtime or extra staff. Similarly, employees who can cover each other’s roles minimize downtime due to vacations or unexpected absences.
Cross-training also improves operational flexibility, so you can redistribute resources to critical areas during transitions or growth phases. Plus, it boosts employee engagement by fostering new skills and career development.
9. Outsource Non-Core Tasks
Outsourcing non-core tasks helps reduce overhead by allowing you to focus on your primary business operations. Functions like payroll, IT support, customer service, or marketing can be handled by external experts at a lower cost than maintaining in-house teams.
For example, a small business might outsource bookkeeping to a third-party accounting firm and avoid the expense of hiring a full-time accountant. Similarly, outsourcing IT support eliminates the need for costly infrastructure and salaries for an in-house team.
When Cutting Overhead Costs Hurts More Than It Helps
Reducing overhead costs is essential for maintaining profitability, but cutting the wrong expenses can disrupt operations and hinder growth. While there are many ways to reduce overhead costs, eliminating critical business expenses without a strategy can lead to inefficiencies, reduced productivity, and higher long-term costs.
One common mistake is reducing semi-variable overhead costs, such as software subscriptions, equipment maintenance, or employee training. These ongoing costs may seem like an easy target, but cutting them can negatively impact efficiency, service quality, and future scalability. Similarly, slashing fixed costs like rental costs or essential administrative costs may create operational disruptions that outweigh the savings.
Before making cuts, small business owners should first calculate their overhead expenses and evaluate whether reductions will genuinely improve financial health. Instead of drastic cuts, a better way to reduce your overhead costs is by renegotiating contracts, improving efficiency, or shifting certain expenses to variable costs where possible.
Careful cost management ensures that overhead costs remain under control without sacrificing the resources needed to grow your business and maintain stability. Thoughtful adjustments, rather than indiscriminate cuts, help businesses keep costs low while preserving essential operations.
Leverage Factoring for a Multifaceted Overhead Win
Invoice factoring provides businesses with immediate capital for their unpaid B2B invoices. Because of the unique way it works, it can help address overhead costs on a number of fronts. For instance, with factoring, you’re in control of when you factor, which makes it easy to manage financial overhead costs. Plus, when you work with a factoring company like Charter Capital, we’ll take steps to help ensure your receivables are paid in full, reducing the risk of bad debt. We also take care of collecting the balances for you, similar to the way collections outsourcing works. If you’d like to start getting paid faster for your hard work and want to improve your overhead with invoice factoring, request a complimentary rate quote.
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:
Profit is typically measured in three ways. Each offers a different view of your business performance.
What Surplus Equipment Really Looks Like
