Operating Cash Flow Results
Cash flow from operations is positive this period. This is
especially good considering that overall results in the
liquidity area of the report are less than ideal, as will be
discussed. It would be positive if the company could continue
to generate positive cash flow to boost the short-term liquidity
position of the company, which may need to be improved.
General Liquidity Conditions
The company's liquidity position seems weak right now and
has declined from last period even though both sales and profits
have improved. It could be that sales are consuming some cash
in the company. It is also not uncommon for growing companies
to have liquidity difficulties from time to time.
The primary weakness in this area seems to be in the cash and
near-cash accounts -- there does not appear to be enough
resources invested in these assets relative to short-term
obligations. Still, the challenge here is one of quality, not
one of quantity. The firm has a "fair" amount of total current
assets on hand, but there just are not enough highly liquid
ones. It could be beneficial for the company to find a way to
"turn" non-cash assets to cash more quickly.
With regard to liquidity turnover performance, the company is
operating in the norm. This company's results in terms of
inventory days, accounts receivable days, and accounts payable
days are all about average right now. Nothing drastic needs to
take place in this area, but in order for the company to become
one of the leading performers in its industry, it may seek to
reduce the values in these three benchmarks over time.
Tips For Improvement
Here are some ideas/actions that managers might consider in
- Use trade credit or vendor financing when reasonable and
feasible. Trade credit occurs when one business receives a
service from a supplier under an agreement to pay them
later. This is typically free debt and a good source of
short-term financing because it does not carry interest.
- If cash is a constraint, try to establish a sufficient
line of credit from the bank. The business should obtain,
but not necessarily use, as much financing as possible from
the bank. If you decide to obtain external financing,
structure it as long-term debt rather than short-term debt
in order to decrease monthly payments.
- Use a monthly or bi-monthly payroll schedule if possible
-- so long as morale will not be adversely affected. This
will allow funds to stay in the business longer. Even labor
outlays are a form of short-term financing.
- Eliminate or reduce some overhead or fixed costs to
reduce monthly expenses. Small decreases in overhead will
typically yield large cash savings over time, especially if
fixed costs can be reduced (those costs which tend to stay
the same over time).