Often confusion may arise between the funding availability generated by a client’s invoice finance arrangement and the net profit that the client generates from sales. This article seeks to clarify the difference between the two calculations. We will use an example of Bob’s Temps to show the difference.
Let’s consider Bob’s first week in business.
Bob thinks his margin is 30% i.e. invoices minus pay. But in fact after all his costs it’s actually 17%. That’s a big difference!
This is the Gross profit for his business, Bob still needs to pay all his bills and his staff… and hopefully himself.
Bob’s wants to know how much he can draw down against his £10,000 of invoices. His funding availability is calculated as a percentage of the outstanding invoices.
Outstanding Invoices: £10,000
So Bob has £2,500 which he can draw to pay his bills. But he will also have to put funds aside to pay his VAT bill in 3 months’ time.
Note the big difference between availability and profit. The reason is that the availability calculation includes the VAT, which at some point needs to be paid to her majesty’s government.