We continually read that ‘ cash flow ‘ is the ‘ life blood ‘ of any business. If that’s the case, and we believe it is!, then how do business owners look for cash flow gaps in their business and fix them.
Lets look at what we will call ‘ red flags ‘ in various parts of our business. What are the warning signs related to those red flags, more importantly, how can we fix them.
Most business owners are familiar with the working capital ratio – that is current assets / current liabilities. We are told that a healthy ratio is often 2:1. That means of course that we should have two dollars of cash, inventory and receivables for every dollar of accounts payable and short term debt. A more important red flag is for business owners to focus on another version of the above ratio, often called the ‘ acid test ratio. That ratio has the business owner taking just cash and receivables and dividing that by the current liabilities number. If the acid test ratio is significantly deteriorating then the business owner should of course recognize a warning flag.
Clearly whenever a business has their bank returning cheques to suppliers etc that is a major warning sign that over all cash flow in the business is not sufficient. Business owners may also check one other vital sign, and that is their payables balance. If payables are increasing and the firm is no long able to take advantage of prompt pay discounts from suppliers that also forewarns cash flow problems and challenges.
Businesses also have term loans outstanding, and naturally any inability to make a pre – agreed upon loan or lease payment is a critical warning sign of cash challenges.
I meet with many owners who continually tell myself they are always ‘ chasing money ‘. That is to say they are focused often times more on trying to collect receivables as opposed to growing their business.
Another ratio, ( we like to call them a ‘ numbers relationship ‘ ) is the relationshiip of current liabilities to inventory. If this number is higher than historical norms or the industry average then clearly the owner has a sense of a clear warning sign. If, of course, any secured lender or supplier has filed a legal action for non – payment, well, suffice to say, that’s a warning sign!
So, we have addressed two key issues in the business owners cash flow dilemma – the deterioration of working capital and the increase of debt in the business.
How can these issues be fixed.? Can they be fixed? Business owners need to focus on restoring the company to historical profitability. They also need to take a strong look at items such as salaries, bonuses, and the bonusing of dividends – these have clearly drained much needed cash from the business. The business may also be more wary of assuming large contracts which tie up inventory and receivables at a time when liquidity is weak. Customers owe the business money. Focus should be on prompt collection according to agreed upon terms of payment.
Business owners can also take a look a slow moving inventory and any assets that are not being used in the business. By addressing these two issues additional liquidity can be brought into the business.
In summary, we have discussed how business owners can see, and spot, and plan for issues relating to the deterioration of working capital and debt load. Prompt and ongoing work in these areas can ‘ unlock ‘ that valuable life blood in the business!
Stan Prokop is the owner of 7 Park Avenue Financial. See http://www.7parkavenuefinancial.com
The firm originates business financing for Canadian firms, and is a specialist in business financing and working capital and cash flow financing alternatives. http://www.7parkavenuefinancial.com/business_financing_services.html
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Direct Line = 905 302 4171
Office = 905 829 2653
Email = email@example.com
Business financing for Canadian Firms , specializing in working capital, cash flow, asset based financing , Equipment Leasing , franchise finance and Cdn. Tax Credit Finance . Founded 2004 – Completed in excess of 100 Million $ of financing for Canadian corporations .
‘ Canadian Business Financing With The Intelligent Use Of Experience ‘
ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
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7 Park Avenue Financial
Canadian Business Financing