Get a free quote

Written by Bob North, President of North Funding Solutions

Cash flow is quite simply the lifeblood of any company. If you are not focusing
on making your cash work as hard as possible, you may be limiting your ability
to expand your business, and in many cases, even survive. Start-ups, companies
with seasonal sales cycles, heavily indebted businesses, and others are always
looking for ways to generate better cash flow to meet their daily operating
needs. Are all of your assets producing the greatest possible cash flow, or
could they actually be limiting your ability to generate more sales and
profitability? In short, if sufficient working capital is essential to
allowing your company to grow. Are you operating in a way that creates road
blocks to cash flow?

The following are five working capital "goblins" that can expensively tie up
cash in ways you might not have considered:

Situation #1 – Too Much In Accounts Receivable: Sales revenue tied up
in accounts receivable is cash you don’t have to generate more sales. The labor,
materials, and overhead costs that went into generating that credit sale often
won’t be recovered for 30-60 days, or more. Hidden costs with carrying accounts
receivable include: cost of raising alternate capital by not having your own
cash available, missed cash discount opportunities from your suppliers, and the
cost of offering early payment discounts yourself to encourage quick customer
payment.

Solution: Factoring (selling) your receivables is a time-tested
solution. It:

• allows you to continue to offer credit terms to your
  customers, but to receive a 70-90% advance of the invoiced amount with 1-2
  days of sale. The balance is payable upon invoice settlement, minus a small
  fee. Your sales dollar resides with you for your use.
• is not a loan, nor does it depend on your credit. It
  is, in effect, unlimited working capital in that it is tied directly to your
  sales volume.
• is a permanent increase in your cash position because
  as future invoices are created they can be factored in as well.

Situation #2 – Cash and Credit Lines Tied Up In Equipment: Money tied
up in large equipment purchases can have a double negative impact by using a
large amount of finite cash for a down payment, plus soaking up available credit
lines best reserved for other purposes. Restrictive IRS depreciation schedules,
borrowing covenants imposed by the bank, and not getting the best equipment
available for your needs are additional limitations associated with buying
assets.

Solution: Leasing your equipment is an option with many benefits. It:

• can be 100% tax deductible.
• does not reduce your credit lines.
• provides payment schedules designed to meet your
  seasonal or start-up needs.
• is not a loan and therefore does not show up as a
  liability, which is important for balance sheet management.
• requires little or no down payment

Situation #3 – Delinquent Debt Being Written Off: Accounts that are
now automatically being written off after a certain period or that are being
pursued through legal means or a collection agency may not be making you as much
money as they could be.

Solution: The selling of delinquent debt can be made into an orderly
process. It:

• gives a stable, ready price for those accounts that
  are going to be written off.
• helps with planning, pricing, and balance sheet
  management.

Situation #4 – Accounts Payable Problems: Servicing accounts payable
problems for companies that have gotten into financial distress can exacerbate
what may be a serious but not necessarily fatal situation. In addition to
spending finite cash trying to appease each creditor and/or pay for legal
expenses, a lot of business time and energy is expended fending off creditor
collection attempts.

Solution: Debt remediation with creditors through third party
negotiators can help restore finances. It:

• frees up management time so that creative effort can
  go back into running the business.
• establishes breathing room for turnaround efforts.
• produces a viable, negotiated program for resolving
  outstanding debt with the creditor(s).
• is free to the debtor because remediation fees are
  paid out of what is saved.
• Frees up cash that is now being spent "plugging all
  the holes" so that it can be used as working capital to restore the business
  to health.

Situation #5 – Cash Tied Up In A Business Note: A business owner who
has cash tied up in a note that was taken back from the sale of a previous
business is someone who is forgoing a huge source of working capital. The note,
while representing periodic payments to you, is until payoff simply a promise of
future cash; it is not the same as cash in the bank for use today.

Solution: Sale of the business note to an interested buyer can
conclude your involvement in prior business. It

• frees your time and energy for your current business
• provides a large source of cash for expanding sales
  and profitability.

In summary, a business owner needs to look at the direct,
indirect, and opportunity costs associated with money tied up in accounts
receivable, equipment, delinquent debt, accounts payable, and business notes. An
asset can look great on the balance sheet, but if it is not helping produce the
most sales and profitability possible, it can be a very expensive asset indeed.

From The

Iowa Business Network

Comments are closed.