It seems like a common sense statement that you have to understand the problem before you can fix it. When it comes to cash flow a number of areas can be pinpointed as the problem, its quite rate that it's just one single item.
Some of those other problems might be a slowdown, (or increase ... by the way!) of sales, external issues that you have no control over - in general market challenges.
Certain financing arrangements you might enter into could actually be dangerous for your firm. It might be as simple as having taken on too much debt , or having an operating facility or working capital arrangement that has too many restrictions on what you can borrow, and what you can borrow against .
Another common mistake we often see is that many credit facilities are set in stone, in effect they are ' capped' so even though you have growing sales, good receivable and inventory .. Well you know the story, you are unable to access a higher limit and tap into the working capital you need.
The optimal solution for any business is the ability of your firm to access higher operating lines when your business is growing or expanding.
A good way to understand this is to imagine that when sales are growing your current cash outflows or payments are being made on items and expenses that were incurred weeks or months previous. So you are in effect accessing business cash flow from your current larger asset based to reduce the obligations of your older debt.
We always spent time with clients ensuring they understand the differences of profitability and cash flow. We find it ironic that many times their success in being able to access business cash flow loans financing and working capital can end up being their downfall. How? It's simple. When business owners and managers are in a position to pay their bills all the time... they, guess what? assume profitability!.
But when things turn around and sales slow and inventories and A/R shrink then there is the danger of being trapped in a downward spiral.
So how can you watch out for some of these key factors ? When you think of it , they are really just basics - if your business cash flow is trending down and your sales are stable there is a problem . If you are in a cyclical business then understand then ensure you understand your cycles. Is it possible to grow to fast or over expand? It sure is. So yes, it's great to grow, but at what cost.
In today's environment that are both traditional and newer alternatives to working capital. Many of them don't involve taking on extra debt. They includes asset based lines of credit, combo receivable and inventory facilities, tax credit financing, purchase order financing , confidential invoice discounting, etc .
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