Friday, January 21, 2011

Small Business Working Capital Tug of War

Small Businesses today are caught in a Working Capital Tug-of-War with there larger big brothers.  Small and Medium businesses are further disadvantaged as they have had a smaller share of limited capital funding over the past several years.  

The following are top Working Capital Challenges faced by small businesses:

1.  Squeezing Cash Out of the business.  There aren't too many more areas left to cut.  Any growth has been fueled more from ongoing operations than borrowing or equity financing.  Businesses of all sizes are holding finance staff more accountable with increased focused on margins, Days Sales Outstanding (DSO), and Days Payable Outstanding (DPO) versus top line growth.

2.  Pent up Demand.  Large businesses are expected to start spending again.  More than 55% of small and medium businesses surveyed expect top line growth in 2011.  This growth will come from large business customers.

3.  Working Capital is the New Credit Reality.  Credit remains scarce.  More than 300 banks have closed their doors since 2008.  Bank lending showed the largest drop since the great depression.  More than 75% of small and medium business had their bank lines cancelled or restricted during this economic contraction.  We will not likely return to 2008 funding levels any time soon.

4.  Liquidity Gap needs to be closed.  We have a large capital divide between large and small businesses.  Debt is becoming more available and cheaper for larger businesses while small and medium business borrowing continues to be restricted.  For many Small and Medium business customers, their  customers are larger than they are.  Most small businesses are reporting DSO's are at all time highs.  The challenge is that large company customers are seeking to lengthen DPO's to manage their cash flow while small businesses are on the other side trying to reduce DSO's, on the other side/

Small and Medium business need to adopt with this financing challenge and secure a new mix of capital if they cannot realign DSO.  In addition to the usual capital sources, a new option is available to businesses with Business Receivables.  Receivables Auctions are becoming more economic viable financing options relative to bank Accounts Receivable financing and Accounts Receivable factoring.

How has your business been dealing with this Working Capital tug-of-war?
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