Cash Flow Management in a Down EconomyTax Professionals' Resource
October 5, 2012 — 1,418 views
One of the more difficult aspects of business management is trying to maintain a positive cash position in a down economy. An economy where customer demand is low is one where customers try to extend credit and terms by delaying their invoice payments and maxing out their credit amongst multiple vendors. The strategy is simple: Max out the credit limit with one vendor before moving on and maxing out the credit limit with another vendor. This allows customers to increase their capital reserves by reducing the amount of cash required to cover payables. Unfortunately, it’s extremely costly for your enterprise and doesn’t help you manage your company’s cash flow. Therefore, here are some simple tips to managing your company’s cash flow in a down economy.
Receivable & Purchase Order Financing: The best way to improve cash flow is to avoid waiting for customers to cover their invoices. This is ultimately why receivables factoring and purchase order financing is so important in a down economy. Receivables factoring is an asset-based lending solution that allows your company to sell its receivables to a third-party financing company. That financing company advances your enterprise capital based on a percentage of your receivables. Once your customers pay their invoices, the finance company reimburses your enterprise the difference and charges a rate for their services. Purchase order financing allows you to use existing purchase orders and confirmed backlog as credit. It operates the same way that receivables factoring does. Once you invoice your customer, the financing company purchases the right to collect on your receivable and you receive capital in exchange for giving the finance company the right to collect on your receivable.
Inventory Financing: If your company encounters a prolonged period of decline in customer demand, then another option includes using inventory financing. This is yet another asset-based lending solution, one where you can use the value of your existing assets to reduce your costs of capital. Inventory is likely your company’s most important asset. As such, the same financing company that allows you to use your receivables and customer purchase orders as credit, will also allow you to draw upon the value of your inventory. However, it’s important to note that your company must have a high inventory turnover rate when using inventory financing. You need to quickly sell inventory in order to cover the capital you’ve borrowed from the financing company.
These two aforementioned asset-based lending options allow you to forego the high costs of capital when confronted by a down economy. All three options are ideally suited to situations where your company has open invoices, and inventory available, but simply lacks the ability to collect on invoices.