Cash flow is the money that comes into and goes out of a business over a period. Positive cash flow means more cash came in than went out; negative cash flow means the reverse.
How it works in factoring
A business can be profitable and still have a cash flow problem. Profit is recorded when a sale is made, but cash arrives only when the customer pays. In the gap, the business must still pay staff, suppliers, rent, fuel and taxes.
Illustrative example: A staffing firm pays its workers weekly but bills clients on net 45 terms. Each new contract means paying wages for six or more weeks before any client payment arrives. The faster the firm grows, the wider that gap becomes.
Factoring targets exactly this timing problem. By selling invoices as they are issued, the business brings cash in close to the time it earns revenue, rather than when customers pay. The cost is the factoring fee.
Cash flow statements usually separate:
- Operating cash flow: from day-to-day business
- Investing cash flow: from buying or selling long-term assets
- Financing cash flow: from borrowing, repaying and owner investment
Advances from factoring generally show up as operating or financing inflows depending on how the arrangement is accounted for.
Why it matters
Running out of cash, not lack of profit, is what stops many small businesses. A simple 13-week cash forecast that shows when receivables are expected to arrive can tell you whether factoring is needed, and how much.