Posts Tagged ‘economic recovery’

Signs of economic recovery?

Friday, May 1st, 2009

I was talking with one of the equipment financing companies last week. I was asking them how their collections were and if they were seeing any kind of an up tick. They said it depended on where you were (upper midwest is a disaster). She said the older companies that were not too leveraged were beginning to show signs of recovery, but everyone else is pretty much where they were.

Even if the economy is starting to show some faint signs of recovery there’s something else to be aware of. More new business does not necessarily mean you are headed out of the woods. The problem is that it takes money to make money. You need capital to fund new business. Simply put, you need to buy raw materials to convert to orders, and you need to be able to carry accounts receivable (AR) until you get paid. You need to collect your AR before you see any increase in your available funds to pay your bills.

When you fall behind due to slow business, you use up your available working capital. When it comes time to fund new business you have only three choices. The first is to get enough money from your customers as a deposit to pay for the goods you need. The second is to get your suppliers (vendor finance) or bank (line of credit) to advance you goods or credit. The third is to put more capital into your business, either from your savings or from additional investment.

All of these are getting harder and harder to accomplish. Oddly, the easiest one we’ve found is to get our customers to front the deposit. In the past they have been reluctant, but with all the news of tight capital markets, most are aware of just how hard it is to get credit for small business. Consequently, they’ve been much more willing to pony up the deposit. Play up the tightness of the markets and this will help you as well.

The second part of the cash cycle equation is getting paid on the back end. Once you deliver the job, you really can’t wait to convert accounts receivables to cash. If you aren’t taking credit cards, do it now. Many companies use commercial credit cards to build airline reward miles. This is a benefit to them and you. You give a few points on the front end to have your cash available pretty much immediately.

If you allow your customers to go 10, 15, 20, or 30 days before paying, you will simply run out of money trying to finance your own recovery. This is one of the most common situations for companies that close their doors. They are litereally busy up to the day the shut down. Being busy is only one part of your success. Cash liquidity or your access to available cash is critical to your on going success.

I think we’re going to seek A LOT of business failures this summer, especially if business begins to pick up. All these companies who are stretched thin and behind now are going to run out of cash trying to finance recover