All business financing comes at a cost which must be absorbed by the profit resulting from your future business. This makes it important for you to have a good estimate of your net profit margin before you accept any business financing arrangement. Otherwise you could take on costs that ultimately exceed the profit potential of your business.
To arrive at the profit margin for a product oriented business you take the cost of the product before sale from the sales price minus all costs like shipping, taxes, commissions, and business overhead. The overhead figure should include such things as rent, utilities, staff, administration costs, marketing, etc. You may want to consult your accountant to make this figure as accurate as possible.
A service business profit margin calculation is a little different. You treat your product cost as the total wages (including any contractor expense) needed to provide the service. You take the wages calculation from the sales price for providing the service minus all of your costs such as taxes, commissions, supplies, travel and business overhead. You may once again want to consult your accountant for this calculation.
Once you know your profit margin you have the ability to focus your business on the most profitable areas first. You might choose to beef up marketing activities, build inventory, or hire staff to support more of the profitable business. This is where your business financing discussion should begin.
Invoice factoring provides cash flow which supports expanded business growth and reduces cash flow pressure. Your costs for factoring are specified at the start of each transaction which means you are able to focus your costs directly against the profit produced by your new business gained. For example, if the new business yields a 36% margin and factoring costs you 6% you will retain 30% margin for your business. In this example, it makes sense to get as much of this type of new business as factoring will support.
Knowing your profit margin will allow you to run your company more effectively. It also gives you the ability to identify when factoring is the right decision for your business.
We are happy to discuss our factoring programs between 9-5 PST at (800) 790-3419. You may also visit our website Oxygen Funding for more information.
There is no cost for us to evaluate your business for factoring support and we usually provide an indication of our evaluation within seven business days.