Cash is the hardest financial flow to manage but invoice factoring can help when sales are constrained and margins squeezed.

At its simplest, invoice factoring is a cost-effective prepayment against the sales ledger. A factor provides cash, up to a certain percentage of the invoice bill and, on payment of the invoice to the factor, the balance less charges is handed over to the business.

There are pros and cons to this tool but the appeal to CFOs and FDs is the ease, speed and flexibility with which a business can increase working capital and improve cash flow.  Cash in 2H 2009 is undoubtedly king and working capital management is front-of-mind for the finance team.

The challenge for CFOs and FDs is that many of the levers that most directly impact working capital are operational - so working capital optimisation must extend beyond the finance department and engage the company's entire managerial team. That’s a significant people challenge.

Seeking stability with agility
Increasing numbers of businesses are exploiting the stability that invoice factoring offers, both in domestic and global markets. Most sectors are under pressure from the struggling economy; sales have been extremely volatile over the past nine months; and the FDs’ ability to crystal gaze is severely constrained.

Another benefit is that it can be ramped up and down in line with business requirements, allowing companies to be proactive, moving quickly and decisively in rapidly changing markets.

As liquidity tightens, the CFO’s ability to secure traditional funding through banks and other financial organisations is constrained. Businesses are considering alternative financial support and toolsets. Approaches like invoice factoring and asset-based funding, for example, are becoming widespread, attractive alike to small, medium and large enterprises.

More businesses want access to tools like invoice factoring to maintain steady and stable cashflow in turbulent times. Companies are examining their balance sheets more closely to identify where capital is tied up and how they can make more intelligent use of all corporate assets.

Traditional formats of securing outside investment is increasingly difficult and cashflow is absolutely critical, and over the coming months Finance Week will explore in detail the pros and cons of invoice factoring and asset based funding.