ARE YOU TAKING CASH FLOW FOR GRANTED?

I’ve written before regarding the critical need for all companies, large and small to manage their working capital (WC). In plant science, we talk about the ‘limiting factor’. You can give a plant all the nutrition it needs, but if you don’t water it, the plant will die. In business, the ‘limiting factor’ is the failure to adequately capitalize your business. Yet surprisingly many businesses fail to formally plan for the adequacy of working capital, putting the organization at risk and possibly jeopardizing their relationship with their bankers.

Working capital is meant to finance your business in the short term, but there are any pitfalls for the unwary. All too often businesses use short term funds (WC) to finance long term assets or allow cash to ‘sink’ into unsold inventory and uncollected accounts receivable. So is there a better way to manage your cash?

The answer is to have a Working Capital strategy designed to manage your cash for the long term financial health of the business. Such a plan would include a 12 month forecast of WC requirements, and ensure that you aren’t financing long term investments in fixed assets with short term funds. It would look at the total funding requirement enabling you to negotiate with banks for your complete needs rather than on a piecemeal basis.

And the upside to all of this is that it will put you in the driving seat when negotiating with banks, because they will be confident that you are managing your needs, that you are a good lending prospect i.e. lower risk and, accordingly, will compete with other banks to offer you a lower cost solution. It’s a win/win for all.

  • 2015-01-13 15:11:40
  • Judith Sherling
  • Cash Flow, Working Capital