| FORTUNE Small Business: | |
How to survive a cash crunch
You need to understand your cash flow cycle, say FSB's experts.
(FORTUNE Small Business) -- Dear FSB: We have a medium size cargo company in India with some blue chip clients, good turnover, and a net profit margin of 20% to 25%. To expand and meet our current clients' requirements, we have borrowed money from financial institutions at a 16% annual interest rate.
Our total net liabilities add up to our net profit for one year, against which we have exactly the same amount of recovery from our clients. Also, we have inventory in hand worth one-fourth of the net profit and assets around 700% of our annual profit.
But we are still in a cash crunch, due to a rapid increase of our turnover. Should we borrow more money or should we concentrate on the turnover we have?
- Ocean Dang, New Delhi, India
Dear Ocean: The business is growing but money's tight - what's a company to do?
The good news is that the cargo and logistics sector is growing rapidly in India, said Sandeep Ghosh, managing director of Citibank's (C, Fortune 500) global commercial bank in India. This means that there is money available.
"Banks and financial institutions such as private equity players are keen to support companies from a debt and equity standpoint," Ghosh said.
But before deciding what's the next step for your business, you need to understand your cash-flow cycle.
"Before you do anything - understand what is happening to the cash," said Stephen Watkins, CEO of Entrex Inc., an investor research and management firm.
Getting a clear picture of cash flow will shed light on the best approach to resolving a cash crunch.
"Once you understand the cash flows of an order, you can usually adjust them to be positive or readjust the business model. This will allow you to understand your expected cash position, and then structure operating expenses accordingly," Watkins said.
Maria Coyne, executive vice president at Key Bank National Association, suggested working with an accountant to set up a monthly cash-flow analysis.
Watkins and Coyne both stressed the importance of correlating the "turn time" of receivables versus payables - essentially, how long it takes a company to collect payments from customers versus how long the company has pay its own debts. These times should match as closely as possible, said Coyne.
Some ways to improve a poor cash situation: You can speed up the receivable cycle by offering better terms for early payment, or require deposits on orders from customers. On the payable side, you can negotiate more favorable terms with your creditors.
If appropriate, a just-in-time inventory method, where inventory spends less time on the books, can also free up cash. So does selling off assets or refinancing long term debt at a better interest rate.
If the growth-driven cash problem persists, then the company will probably need more capital in either equity or debt, said Coyne. But Watkins warns that borrowing may not be the answer.
"Keeping sales where they are might be a slow death - whereas growing sales might make a quicker one - but more borrowing might leave you working for the bank," Watkins said. 
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