First things first, I’m sure some of you are asking, what the heck is a Factor? Well factoring, or accounts receivables factoring, is the selling of the business’s accounts receivable to a factoring company. The factoring company (factor) pays the business a percentage of the value of the accounts receivable and deducts a fee for the cost of collections. Then the factor collects the receivables. One way to look at factoring is that a business is outsourcing its receivables collections process. Recently, I had a client that uses this process and wanted to know how to track everything in QuickBooks.
The way this particular client does things is she creates every invoice in QuickBooks. Then she gives only some of those invoices to her Factor. In the meantime, the Factor gives her lump sum payments or “advances” of money to pay her for these receivables. She needed to track which invoices went to the Factor and which ones stayed in house and then which ones were paid by the customers and how much money is owed to her from the Factor after the advances. At first, I was stumped.
After playing around with QuickBooks and learning about the client’s process I came up with an idea. First, we created a 2nd Accounts Receivable account in the COA called “Factor AR.” Any invoices that were to be given to the Factor were created out of this AR account. Then, on a daily basis the client was able to get a Cash Receipts report from the Factor to see which invoices had been paid by the customer. Using this report, my client goes to Customers>receive payments in QuickBooks. She receives the payments against the invoices in the normal fashion, but instead of having the payment go to the normal “Undeposited Funds” account, we had it post to a new Other Current Asset account called “Due from Factor.” This process would reduce the actual receivable (because it’s paid) and increase the “due from Factor” account therefor showing that money is owed to them from the Factor.
Now, when lump sums of money were received from the Factor, all that needs to be done is make a deposit in QuickBooks depositing the money into the checking account and choosing “Due from Factor” as the From Account. This process will increase the bank account and decrease the “Due from Factor” account therefor reducing the amount of money that is owed to them from the Factor. If you then double click on the “Due from Factor” account, it will have a running balance just like a bank account so you can see the balance owed to you from the Factor.
Now with the normal accounts receivable that she has that she does not send to the Factor, she manages that normally in QuickBooks. Create the invoices to the normal AR account, receive payments to the undeposited funds account and make deposits as normal.
As always, give us a call if you need any QuickBooks help!