Cash flow tips offered

December 7, 2009
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During the financial crisis and ensuing recession, credit has become increasingly difficult to obtain for middle market companies with annual revenues between $20 million and $500 million. According to a recent Federal Reserve Board survey of lending officers, during the past three months, U.S. banks have continued to tighten standards and terms on all major types of business loans. To help companies weather the continuing economic storm, following are some tips on how organizations can strengthen their balance sheets and cash flow positions.

Banks used to be the principal source of funds to finance growth, seasonal working capital needs or temporary performance issues. As banks have reduced or eliminated financing commitments, companies have had to look for other ways to maintain cash flow. Maintaining liquidity is critical for businesses to survive and prosper in the current economic environment, and cash flow is a key element of that liquidity.

Company officers and managers should follow these steps to help maximize the liquidity within their organizations:

  1. Maintain a well-defined cash management system and compare forecasted goals to actual results. One person in the organization, typically a CFO or controller, should be accountable for the organization’s efforts to maximize its liquidity.

  2. Maximize liquidity by reducing excess inventories, focusing on accounts receivable collection and negotiating longer payment terms with vendors. According to Anderson, these changes can produce very quick improvements in a company’s cash flow.

  3. Sell underused assets, such as excess equipment or real estate. Although this is typically a longer-term solution to liquidity issues, companies should continually examine their core businesses and sell or dispose of assets that are not productive. If a company is in deep financial distress, it may need to sell or dispose of all assets that are not critical to its core business.

  4. Investigate tax refunds as a source of potential cash. A new provision, enacted as part of The Worker, Homeownership and Business Assistance Act of 2009, expands an earlier law from the American Recovery and Reinvestment Act that applied only to small businesses. Under this new law, business losses incurred in 2008 or 2009 by businesses of any size can now be used to recoup taxes paid in the prior five years.  This law could provide benefits to a company with a recent history of losses and profits in prior years. If this new rule applies to a company’s situation, it may result in tax refunds that could come sometime in 2010.

  5. Explore alternative financing. If current lenders are not willing to provide additional funds, companies should investigate alternative lenders or alternative types of financing. Although new financing for companies in deep financial distress is difficult to obtain in the current environment, an organization may increase liquidity by restructuring its debt or changing the type or duration of existing debt.

The current economic crisis has forced numerous businesses to make difficult decisions about their business models. However, in the current financing market, adequate liquidity is critical to surviving the downturn and prospering over the competition.

Ray Anderson is regional group leader of accounting firm Crowe Horwath LLP’s restructuring advisory services group.

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