Follow your banker’s lead in this area. You may be pleasantly surprised at how helpful a good long-time personal banker can be to you and your business situation. They really do want you to survive and thrive!  For a business that sells on thirty-day terms, as the economy turns down and sales drop, accounts receivable are collected from prior periods. This anomaly can cause many people to feel they are in a much better cash position than they really are. Be aware of this fact and conserve cash.

 

As the economy and your revenues recover, Accounts Receivable and Work-in-Process will also increase. These normal and other current asset changes are going to have a dramatic increase as your business improves at the sales line. Be prepared! Plan for this cash utilization to occur. What is often difficult to understand is just how much cash is consumed by working capital in a growth cycle. In normal times, growth in excess of 15% per annum will put a strain on most businesses. In a recovery cycle, percentage growth can be buried by what appears to be smaller absolute growth in working capital requirements. It is these incremental changes that happen faster than normal and put a lot of pressure on the business.

 

They can put a business owner in exactly the place they do not want to be. To avoid this situation, every business owner should first understand the “cash conversion cycle” in their business.