Any size company needs a certain amount of liquidity to conduct business in an effective and efficient manner. Use of liquidity usually starts with purchasing inventory and covering operating costs and payroll, but it does not end there. Often there is critical debt service to maintain, dividend expectations to meet, capital expenditure needs to fund, etc.
So what do you do if you find yourself running out of cash?
First, figure out why, and then correct the problem. The causes of the problem are not always obvious. There are at least six factors that individually or in combination create a cash drain:
- You are losing money and thus your income statement needs to be examined for casuals, margins and fixed costs in particular.
- You have too much debt to service and this needs to be analyzed with alternatives examined. Perhaps your lender can be approached to restructure the debt.
- You are not effectively managing your net working capital (receivables, inventory and payables).
- You have spent a lot on capital expenditures and they are not adding value or the payback has not yet occurred.
- Sales are growing and this is requiring more funds in working capital (which is normal). Even the good news of a sales increase almost always requires more cash.
- Too much equity/salary is being taken out of the company by the owner(s).
If you are running out of cash, it is important to talk to your banker, perhaps to obtain a temporary over-line, and develop a short-term, detailed cash flow forecast to make sure you can fund the critical needs of the business. Lastly, you may want to consider talking to an outside financial advisor to draw upon his/her experience in these areas.
Richard Taylor is president of Global Capital Advisors LLC in Milwaukee.