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Addressing Cash Needs During Tough Times

Your business has been riding the waves of the economic storms over the last three to four years without being swamp by the rogue waves of the loss of major customers, threat of new product innovations from competitors, and dramatic increases in material prices.  You and your team have been plowing through the sloppy seas that have slowed down the progress of your business plans.The cash needed to fuel your business has also been diminishing.  Additional credit is available, but you are concerned if your lender will provide you continued access to capital if your business stalls out.

You do need to proceed to examine the alternatives for capital as financial institutions are willing to make deals with companies whose assets and cash flow minimize the risk of under-collateralization to the lender.  However, some housecleaning may be in order to turn some trash into treasures and implement new ideas that slow down the need for incremental cash.

Let's start with your current assets and liabilities:

   1.  Accounts Receivables – Comb through accounts receivables for opportunities to collect cash

  • Offer early payment discounts to customers with long tail maturities.  If a customer has 60 or 90 day remaining on the receivable, offer a 2% to 4% discount to get the cash in now.  Scale the discount back for more current receivables.
  • Take action on delinquent accounts.  Depending on the relation with the customer, file legal action where feasible or take a severe discount and try to sell the receivable to an agency that specializes in collections.
  • Consider factoring the receivables to a financial institution for a discount if quality of the customers is good.
  • Review all loans to officers, directors, employees and affiliates for acceleration of payment schedule or implementing payment plans if none is in place.

   2.  Inventory -Shift through Inventory to identify excess, obsolete or slow moving goods

  • Consider follow-on sales of slow moving items to previous customers or other OEM suppliers
  • Auction or salvage obsolete materials.
  • Cut back on orders to Just-In-Time deliveries so that you are not financing as much inventory.
  • Ensure that inventory turns and inventory levels are being captured and reported to identify potential overstock areas.
  • Review relations with vendors, look to optimize acquisition costs, and improve terms with the vendors.
  • Ensure your procurement department or buyers have goals and have embraced the program for improving inventory management.
  • Consider use of consignment inventory where cost effective

     3. Prepaid Expenses and Deposits – Restructure period payments of prepaid  assets, if possible

  • Negotiate improved installments from customers on longer term projects
  • Consider use of premium financing for Business Insurance Programs
  • Look at alternatives such as surety bonds for tax and other deposit requirements

    4. Fixed Asset

  • Consider Sale / Leaseback of Real Estate or Equipment
  • Evaluate the sale of seldom used or residual personal or real property
  • Leasing of future asset acquisitions
  • Consider postponing non-essential projects or asset acquisition.

   5. Other Assets

  • Is there residual property to sell?
  • Is there an investment in a Joint Venture that could be liquidated?
  • Review current year tax projections – is there a possibility to file an early refund for current year deposits in excess of projected liability.

   6.  Payable   

  • Can you negotiate more days payable with existing vendors.
  • Have credits for returns, defects, allowances and other programs been fully utilized.

Consider short term changes in the capital structure.

   7.  Term Loans could be re-negotiated for longer terms, deferred payments, and better covenants in exchange for higher interest rates or warrants to acquire equity.  Alternatively, new financings may be obtainable in the form of preferred stock with a higher accruing dividend rate.

Consider changes in how you operate your business.
   8.    Consider using a joint venture approach with a complementary partner who can contribute cash, production capabilities, distribution services and extended market reach..

   9. Reconsider your current production cycle for inefficiencies.   Review lead time on material orders, scheduling of production runs for efficiency with limited down time, scheduling of any customer in-progress reviews on sign-offs that may delay operations,  excessive scrap and waste, or inspection or certification processes that excessively delay deliveries to the customers.

   10.   Review and implement cost reductions that will not be detrimental to your company's ability to respond to an upturn in business.  Consider:

  • Salary rollbacks for all management and staff that will be recoverable at a future date.
  • Postpone or pare back non-essential training, conference, systems upgrades, office equipment replacement, and programs that are not sales driving machines.  The focus at this time is to increase revenues and gross margins.
  • Where possible, add marginal surcharges and price increases to boot cash flows without losing customers.
  • Consider selling off or shutting down non-core business operations that are not contributing to gross profit or require too much capital.  Be careful that any loss of the assets may materially impact an asset-based lending arrangement.

These are a few items to consider.  Often managers are too entrenched to make decisions regarding their own operations and territorial disputes can arise.  Consider hiring an experience turnaround manager to assist in the execution of these duties. 

Want to discuss specifics with Dave?  Email