Disincentive for delayed payment
In the normal course, there is a time lag between delivery of goods and receipt of payment, although there could be exceptions. The customer who pays after receiving products becomes a debtor. There are ways to minimise the disadvantage of delay in receipt of money. Some of these may be seen below: a) Incentive for prompt payment An appropriate price discount can be offered to the customer for prompt payment and in this case, an amount that is lower than the invoiced amount is realized. b)
A condition can be included in the invoice for payment of interest for delayed payments. (Although it is given here as an option, the customers may not like imposition of this condition) c) Factoring Finance houses and banks offer factoring facility, by which the factoring service provider “buys” the debts making available, a significant part immediately, and the remaining when customer settles the bill. Factoring is done usually when a time limit is agreed between the customer and seller.
There is a charge for factoring. The factoring agencies normally consider the credibility and reputation of the customer while agreeing to accept factoring. d) Invoice discounting This facility can be availed of, to minimise the period between the date of submission of invoice and the actual receipt of money in the bank. Although this is similar to factoring, this does not offer any credit facility to the customer. There is however a charge for invoice discounting. Expenses paid in advance
Advance payments, if required for making purchase of inputs increases the working capital requirements. Such payments should be made only in essential cases. Creditors Creditors are those to whom the firm has obtained goods or services and to whom related payments are due. This is a latent outflow of cash. Good management of creditors warrant that creditors are paid in time so that the agreed facility is continued. If at any time need arises for more time to make payment, this should be negotiated to mutual satisfaction. Sourcing funds by a Sole Trader
A Sole trader has to depend on own funds with a minimum of borrowed funds. Borrowed funds can be found through the following options: a) Mortgage b) Hire purchase c) Long term bank loans d) Overdraft The Sole Trader has to arrange for security for all the options, either by pledging assets deployed in the business or his or her personal assets. Banks or other lending agencies value the assets pledged and regulates the loan after setting off certain margins to cover risks. This means that the entire value of the asset is not granted as loan.