Wednesday, September 02, 2009

Tightening the Screws on Cash

Money tied up in working capital is not available to grow the business - or in today's environment, not available to help a company survive the economic turmoil.

So it's not surprising that The Wall Street Journal (subscription required) gave front page coverage to the most recent study by REL Consultancy on how big firms are expediting cash collections and slowing cash payments - particularly at the expense of the smaller or weaker companies with whom they conduct business.

The largest companies are particularly good at this cash flow exercise. Companies over $5 billion of annual revenues remit their payables on average in 55.8 days and collect their receivables in as little as 41 days - a net of almost 15 days of working capital in their favor.

Companies below $500 million in revenues are not quite as successful in managing cash flow. The cash is going out the door faster than it comes in! The small and mid size enterprises take almost 59 days to collect their receivables while remitting payments in a fraction over 40 days - a net of almost 19 days of working capital to their detriment.

Many of the small and mid sized companies that I see are experiencing a similar working capital crunch. As a result, some of these companies lack the cash to take advantage of new orders that could lead to a return to profitability as the economy improves.

In an environment where credit is tight and more expensive, it pays to carefully watch one's working capital and cash flow!

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Tags : working capital , cash flow , accounts receivable , credit crunch , REL Consultancy

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