Cash flow - pinpointing the issues and fixing working capital deficiencies

How do buiness owners identify and fix cash flow challenges

We continually read that ' cash flow ' is the ' life blood ' of any business . If that's the case, and we believe it is!, then how do business owners look for cash flow gaps in their business and fix them . <br><br>Lets look at what we will call ' red flags ' in various parts of our business . What are the warning signs related to those red flags, more importantly, how can we fix them .<br><br>Most business owners are familiar with the working capital ratio - that is current assets / current liabilities . We are told that a healthy ratio is often 2:1 . That means of course that we should have two dollars of cash, inventory and receivables for every dollar of accounts payable and short term debt . A more important red flag is for business owners to focus on another version of the above ratio, often called the ' acid test ratio . That ratio has the business owner taking just cash and receivables and dividing that by the current liabilities number . If the acid test ratio is significantly deteriorating then the business owner should of course recognize a warning flag .<br><br>Clearly whenever a business has their bank returning cheques to suppliers etc that is a major warning sign that over all cash flow in the business is not sufficient . Business owners may also check one other vital sign, and that is their payables balance . If payables are increasing and the firm is no long able to take advantage of prompt pay discounts from suppliers that also forewarns cash flow problems and challenges . <br><br>Businesses also have term loans outstanding , and naturally any inability to make a pre - agreed upon loan or lease payment is a critical warning sign of cash challenges . <br><br>I meet with many owners who continually tell myself they are always ' chasing money ' . That is to say they are focused often times more on trying to collect receivables as opposed to growing their business . <br><br>Another ratio, ( we like to call them a ' numbers relationship ' ) is the relationshiip of current liabilities to inventory . If this number is higher than historical norms or the industry average then clearly the owner has a sense of a clear warning sign . If , of course, any secured lender or supplier has filed a legal action for non - payment, well, suffice to say, that's a warning sign !<br><br>So, we have addressed two key issues in the business owners cash flow dilemma - the deterioration of working capital and the increase of debt in the business .<br><br>How can these issues be fixed .? Can they be fixed ? Business owners need to focus on restoring the company to historical profitability . They also need to take a strong look at items such as salaries, bonuses, and the bonusing of dividends - these have clearly drained much needed cash from the business . The business may also be more wary of assuming large contracts which tie up inventory and receivables at a time when liquidity is weak . Customers owe the business money . Focus should be on prompt collection according to agreed upon terms of payment . <br><br>Business owners can also take a look a slow moving inventory and any assets that are not being used in the business. By addressing these two issues additional liquidity can be brought into the business . <br><br>In summary, we have discussed how business owners can see, and spot, and plan for issues relating to the deterioration of working capital and debt load . Prompt and ongoing work in these areas can ' unlock ' that valuable life blood in the business!

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