Businesses which use any form of invoice finance will be used to receiving a monthly client statement form their bank or provider each month. This is an important document which shows-
• How their availability is calculated
• How much they owe the provider
• Where, and how funds are held up
Many business leaders or staff don’t fully understand the client statement or how exactly to interpret the numbers behind it. This blog aims to simplify the client statement and explain how to read it correctly.
The easiest way to explain the client statement is to split it into 3 sections
1. Sales ledger
2. Statement
3. Entitlement
Below is an illustration of how these 3 sections will typically appear on your client statement-
Sales Ledger
On the left hand side of the statement you will see the sales ledger balance.
This is simply the amount that all of your customers owe you. With a full ledger facility this should always match your accounting system. In turn here is what each line shows-
1. The opening balance is simply your debtors balance at the start of the month
2. Invoices and credit notes show the total value of uploads in the month, and below any adjustments to those figures.
3. Net assignments represent the balance of the above invoices and credit notes. As long as the value of Invoices is higher -this will always increase your sales ledger balance
4. Collections to date show the amount of receipts you have collected from customers in the month. This will reduce your sales ledger balance
5. Disapprovals shows you the value of invoices currently not approved for funding. This is an important number to keep track of, as it represents invoices that you are not receiving an advance/funding against. Having invoices held up as disapproved will reduce funds available to draw down, and therefore harm cash flow. Invoices can be disapproved for a variety of reasons. It is always best to speak to your provider about them but, some of the most common examples of why invoices are disapproved are-
• Credit limits. Your bank or provider may attach specific credit limits to certain debtors. This means that they will only fund invoices you raise to a particular debtor up to a specific outstanding balance. This is to reduce the risk that the provider is taking on to lend you the money. Once your debtor pays and their outstanding balance is reduced the funds will be released
• Concentration. Invoice finance facilities often come with concentration limits. This means that one debtor cannot be more than a certain % of your Total sales ledger. For example if your facility has a 50% concentration limit, and you have a total sales ledger balance of £100K, with a single debtor making up £60K of the balance-£10K will be disapproved due to concentration
• Documents not received. Sometimes your provider may ask you for documents to support an invoice you have uploaded, such as POD’s. Usually this will only be requested for certain invoices, as a spot check-although the information required will depend on the terms of your facility. It is best to ensure that you provider has all of the information they have requested to avoid hold ups in funding
6. Finally you will be left with Approved Debt. This represents your closing sales ledger less disapprovals-which is the amount you can receive your advance against. In the illustration above the client has an approved debt balance of £154500, meaning that if this was day one of the facility you would receive £154500* 80%= £123600
Statement
On the right hand side you will see your client statement balance. This shows the amount that you owe your provider at a particular point in time.
In turn here is what each line shows
1. The opening balance is simply the amount you owed the provider at the start of the month
2. Collections. This shows the amount of receipts you have collected from customers in the month, and will be the same amount that is seen on your sales ledger. This reduces the amount you owe the provider, as in theory your customers are paying the provider instead of you, effectively repaying what you have borrowed
3. Payments to date. This shows the total amount you have withdrawn from your facility in the month. When you withdraw money from you facility it will Increase the amount you owe the provider.
4. Charges. This shows the fees that your provider has charged you in the month. The charges increase the amount you owe the provider, although in real terms they will be deducted directly from your facility, therefore reducing the amount you have available to draw down. The different types of charges and amounts will vary from provider to provider (which should be explained to you in detail by the provider) but usually the main types of charge are-
•Factors Discount – this is the interest charged on the money that you borrow from the provider. This is calculated as a % on your statement balance.
•Factoring fee – this is the service fee your provider will charge you for running and administrating the facility, as well as collecting your debt from customers with a full factoring facility. This is usually charged as a % of the value of invoices uploaded.
•Disbursements– usually this refers to payment charges and any exceptional, one off charges made for making changes to the facility. If you have bad debt protection through your facility the charges for this may also be included in disbursements.
•Refactoring-your provider may charge you an extra amount of interest for invoices that are particularly aged. For example 1% on the balance of invoices which are over 90 days old
5. Closing balance. This is the sum of all of the above, and represents the amount you owe the provider at the end of the month
Entitlement
At the bottom of the statement you will see Entitlement. This shows the amount of funds that you should have Available to withdraw.
Your entitlement is calculated by taking the sales ledger balance and Deducting the client statement balance
As described above the Sales ledger shows the amount of funds generated by advancing against your debtors, and the client statement shows how much of these funds you have already withdrawn, therefore sales ledger less client statement= Entitlement
For more impartial advice on invoice finance, or a for a free review of your current facility please Contact us
Please don’t forget to read our related Blog Invoice Finance- a user guide