MP Star invoice factoring business case study: Factoring helps new company get over the start-up hump

The Akron-based injection molding company had been operating for less than a year.

Business was fairly consistent and prospects were encouraging. Orders came in from customers in numerous, diversified industries and the management group projected modest sales growth for the second year.

Still, there was the issue of cash flow. It’s nearly always about cash flow.

Start-ups are expected to have cash flow problems. It’s almost inevitable. New employees. Rent. Equipment. Materials. Sales and marketing. Taxes. Plus dozens of other expenses that might not have even been thought of, let alone budgeted for, tend to sneak up.

Cash Flow Problems

At first glance, the company’s financial statements appeared to show that the business was in fairly good health. Expenses associated with day-to-day operations (salaries, rent, utilities, taxes, etc.) were easily absorbed by confirmed orders, which were already being filled. Profit margins on sales were typical for the industry.

But, despite the company’s relative success, a combination of factors had put the firm in the position of potentially running out of cash in 60 days.

The company’s management team was caught off guard, but it didn’t take long to figure out what was happening.

The Analysis of the Cash Flow Problems

Two factors were primarily responsible for the looming cash crisis.

1. Slow-paying customers. The young company was lucky enough to secure large orders from two car manufacturers, who tend to be major buyers of injection molded products. That is the good news. The bad news is that the automakers tend to be chronically slow payers, especially when dealing with small vendors. Outstanding invoices in the 75- to 90-day range were not unusual.

The molding company had delivered products that were accepted by the car companies, but might not be paid for for  almost three months.

2. Unexpected costs. The injection molding business, like many manufacturing industries, is dependent on access to the right raw materials to make its products. But as production increases, so do the “variable” costs of buying more materials, which are necessary to fill the orders. The increase in revenue will more than offset the increase in costs, but not until the invoice is paid.

Unfortunately, the company had to absorb the higher material costs up front, then make the products, and then get paid.

So despite having a sales and production record many companies would envy, and because of factors beyond its control, the start-up was in serious danger of not being able to pay its bills.

The MP Star Financial Cash Flow Management Solution

All this left management with some unattractive options – laying off staff, being late on some of its own bills, securing an expensive bank line of credit (in addition to debt already on the books), or turning down additional business until its receivables came in.

The company’s president was referred to MP Star Financial for advice. He talked about his cash flow problems and inquired about invoice factoring as a potential cash flow management solution.

Not surprisingly, the company did have enough cash coming in – eventually – in receivables to meet its operating obligations.

MP Star arranged an invoice factoring program in just a few business days. By factoring its largest invoices (including those to the car companies) the company was able to access more than 80% of its outstanding receivables almost immediately.

The Result of the Cash Flow Management Plan

The invoice factoring plan arranged by MP Star allowed the company to get beyond the cash flow “growing pains” of the first couple years in business.

The company used factoring to stay current on its expenses and build excellent business credit. It also leveraged its strong cash position to negotiate better prices with vendors, and was able to fund its growth plans by adding staff and upgrading equipment whenever needed.

For more MP Star Financial invoice factoring case studies:

Business Case Study: Invoice factoring leads to IRS tax settlement

Business Case Study: Invoice factoring helps company win major contract

Business Case Study: Invoice factoring helps company survive cash flow interruption

Business Case Study: Invoice factoring partnership boosts company’s exports

Business Case Study: Invoice factoring works when business is good…but cash flow is terrible

Business Case Study: Invoice factoring makes corporate buy-out possible

Whether your business is a start-up or established, MP Star Financial can help with your cash flow problems. Call MP Star Financial for more information about invoice factoring at (800) 833-3765, extension 150.

 

 

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