Manage Your Liabilities to Increase Cash

While accounts receivable and inventory are two assets that can dramatically impact cash, it is important to consider liabilities as well.

Liabilities-An Overlooked Source of Cash

Since liabilities represent what is owed others, it may seem unusual to consider how they can increase cash. Well, in reality they aren’t a source of cash but how you manage them does impact cash. Let me explain what I mean by the phrase manage your liabilities to increase cash.

Discounts

While a company must pay its creditors, many overlook the fact that being diligent about paying on time can reduce the amount of cash required. Yes, the cash may be spent earlier but you will use less of it. For example, imagine your company typically spends about $100,000 monthly and of that $50,000 is to vendors offering terms of 2% discount if paid within 10 days or net 30 days. So, if you take advantage of the 2% discount and you will spend $1,000 less each month. For paying 20 days early you get $1,000. Are you aware on any investment where you could place that cash for 30 days and collect $1,000 on $50,000? That would be essentially earning $12,000 per year on $50,000 which would be a rate of return of 24%. Yet, you are really just paying 20 days early so that would be like earning $12,000 on a $50,000 investment for 240 days (20 days/month x 12 months). So, it is not really taking a full year to earn that $12,000, meaning the rate of return is better than 24% and closer to 36%. This is a classic example of how to manage your liabilities to increase cash. In this case, at the end of the year you have $12,000 you would not have had. It’s always nice to hold onto a little extra cash.

Unnecessary Purchases

Whether it is for inventory, expenses, or capital equipment, every company would be well served to consider just whether they really need to make a particular purchase. This is where a budget or spending plan can come in handy. I say “can come in handy” merely because so many companies make a budget and then never use it to control their spending. Each time, before spending, stop to consider two things:

  1. Is it in the budget?
  2. Even if in the budget, is it still really necessary?

I venture to surmise that by simply actually using a budget in these two ways, most companies can save themselves quite a lot of cash.

Think About It

If you are always finding yourself strapped for cash, perhaps it is time to better manage your liabilities to increase cash. It is worth the initial extra time and effort and eventually should become automatic.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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