CASH SHORTAGE ALARM: Remedial Actions

If your company has a cash shortage and needs to improve its liquidity position (and of course profitability, although this will in the sort-term be less important than generating cash), WHAT ACTION CAN IT TAKE? The company must seek to maximize its output from the limiting factor which cash resources represent.To do this must ensure that:
  1. Margins are set at a level to generate adequate demand AND cashflow/profitability;
  2. Assets are fully employed.

Below is a list of possible areas for improvement:

STOCK

80/20 rule (concentrate on the few items which will have the biggest impact in cash terms)
Reduce re-order quantities
Dispose of slow moving/obsolete stock
Consider alternative suppliers (re: price and/or credit given)
Shorter production runs (may affect profitability)

DEBTORS

Tighten initial inspection
Review invoicing model
Review credit terms
Ensure terms MET (particularly if discounts for early payment are given)
Obtain progress payments (attention: this may reduce profitability)
Consider factoring (for improved efficiency, reduced fixed costs, faster receipt, possible use of finance facility) or invoice discounting if appropriate.

ASSETS

Dispose of surplus assets
Consider sale and leaseback
Lease rather than buy.

PRODUCTS

Which are ‘cash hungry’ ?
Which have the better ‘turn’ ? (even if longer-term profitability may suffer)
Where is the product on its ‘life cycle’ ?
If products dropped, will your company then be losing contribution to fixed costs, which will continue anyway ?
Which products does your company ‘like’ to produce and which SHOULD it produce?
80/20 rule on margins/cashflow (concentrate on the few items which will have the biggest impact on profits/cashflow).

LABOUR

Consider reduction in staffing, if possible
Consider sub-contract labour
(Potential union problems if above undertaken)

CAPITAL EXPENDITURE


Consider new projects very carefully
Review existing projects in pipeline (are they continue because a great spent already or because they will really be viable and cash producing in the near future ?)
Review advertising budget.

MANAGEMENT

Can they be trusted to take ‘hard’ decisions ?
Consider reducing numbers
If your company is a family business, who has the power to replace ?
Do you need outside advice ?

As soon as liquidity problems have been identified, you need to re-assess the overall picture, consider what further information you need, react speedily and take positive action.

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