Aug 16

Increase in ‘Accounts Receivables’ can hurt your plans on debt reduction

Increase in ‘Accounts Receivables’ can hurt your plans to work on debt reduction.

The turbulent economic conditions have led to the creation of a new type of entrepreneur. Massive corporate layoffs have resulted in an explosion in the number of people collecting benefits. Many people believed that during the period in which unemployment benefits were being paid would be long enough to allow people to find a new job. However, what was not anticipated was that many people would never be hired during this period and that unemployment benefits would expire.

As a result of the dismal prospects of getting a job many people decided to start their own business. The new entrepreneurs were forced into becoming a small business owner as opposed to the traditional entrepreneur who had decided from the beginning that corporate life was not for them.

Regardless, as to the type of entrepreneur who is running a small business, the common theme has always been that the business has been under capitalized.

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In layman terms, under capitalized means “I did not have enough money to start a business”.

As a result of not having sufficient capital(money) to pay bills on time, extend generous credit terms for customers to encourage them to purchase product/services, a new computer system, renovate the office, hire new salespeople etc. The owner’s business decisions are being hampered by lack of funds. Of course, an owner should always review the impact to cash flow but when you start off having very little money you will be struggling from day one.

A Selected few will be able to overcome many start up issues including the lack of capital, and the company will flourish. Unfortunately, the lack of capital from day one will plague the business owner throughout the business life.

One interesting but unpleasant fact is that a sudden explosion of sales may cripple a business owner getting one’s self in the vicious cycle of debt. Typically a large sale will result in the company having to pay for goods/services from their supplier well before the customer pays the invoice which has been sent. In addition a large project may result in higher payroll costs. Employees expect to get paid even if the client has not paid the bills.

This problem is compounded when an inventory based company is forced to keep extra inventory on the shelf to meet the demands of a growing customer base. Many times you will be paying for inventory months before you are able to sell the product. Again, your cash flow has been strained. It is important to understand that increasing revenue is amazing provided you are able to manage cash along the way.

Of course, companies run into cash problems for many other reasons which include insufficient sales to support overhead, excessive owner’s compensation, incorrect estimates of the cost of producing a product or completing a project, inclement weather such as a hurricane forcing your business to close for a week. It appears that the list of what can go wrong is almost endless.

If you do find your company struggling to pay bills, receiving collection calls from creditors, being served with a summons it is important not to panic.  It is more than likely time to consult with a company who skilled in debt relief who can help you with a debt settlement with your creditors. Business Advisory Center has been helping improve company’s cash flow since 1997. Our company will negotiate with your creditors or their attorney. Majority of the time, we obtain reductions in your business debt (bank loans, credit cards, and accounts payable, leases) of between 22% and 50% from the original balance-with payment terms on the reduced balance from 3 to 12 months.