What is a Factor Return?

Malcolm Tatum
Malcolm Tatum

When it comes to finances, a factor return can refer to an evaluation process that helps companies to make sure they are earning the greatest possible return on the goods and services they offer, or to a specific type of remuneration generated by a particular business service. In both scenarios, the goal is to make sure that all parties involved are receiving the greatest degree of satisfaction from their efforts with specific amount of return achieved. Should the return not be satisfactory, calculating a factor return can sometimes help identify ways to refine the process so that an equitable level of satisfaction is achieved.

Businessman with a briefcase
Businessman with a briefcase

A factor return is the amount of return that is generated as a result of the performance of a given element or factor that is relevant to the production and sale of the goods or services. The purpose of calculating this type of return is to determine if the resources utilized to create sales and some sort of profit are actually performing at peak efficiency. Assessing the factor return can make it possible to identify expenses that are not actually helping to generate return, eliminate or replace them, and increase the bottom line.

One example of a factor return would be to examine the contribution made by a specific raw material used in the production of a particular good. The idea is to determine if the investment that is made in the purchase of this raw material is in fact making a contribution to the success of the finished product in any significant manner. For instance, a company that makes household cleaners may determine that the inclusion of orange oil in the cleaning formula helps to increase the efficiency of the product, and has resulted in increased sales as consumers begin to favor the improved product over the competition. In this instance, calculating the factor return will determine if the additional expense of including the orange oil is offset by the increased revenue earned from sales, allowing the company to earn a higher return on the production of the product.

In the business world, the factor return can also apply to a type of business service known as factoring. Factoring companies essentially purchase the accounts receivable of a business in advance, allowing that business to receive a significant amount of the value of those invoices without waiting for clients to issue payments. In exchange for this factoring service, the factoring company retains a small percentage of the payments as they are received. Once the clients have paid all invoices that were purchased in a given batch, the factoring company releases the remainder of the funds due the business, retaining only that small percentage as its fee. With this application, the factor return is the amount of the fee that the factoring company retains in exchange for its services.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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