When cash flow turns to a trickle

Everest Roofing was a successful construction business whose sales continued to grow, despite more difficult trading conditions. But, even while sales were rising, Everest had a growing cash flow problem.

Most of their suppliers were paid cash on delivery or on seven day terms, while it took them an average of 60 days to collect on customer accounts. At the same time, expenses were on the rise as they ramped up to fulfil new orders. The result was that their cash balance was shrinking, even while sales were soaring.

First, Everest needed to understand the problem. So they created a cash flow tracker, plus a cash flow projection for the rest of the financial year.

Next, they used a loan to fund purchases of equipment, freeing up extra cash. And they negotiated longer terms of trade with key suppliers.

Finally, they agreed on new payment terms with their customers and put a system in place to manage accounts receivable.

With new terms of trade in place, Everest increased their payments cycle to an average of 60 days, while reducing the time lag between making a sale and banking the revenue to an average of 30 days.

By using a loan to pay for vehicles and equipment, instead of buying them out of current cash flow, they freed up extra funds and made it possible for the assets to pay for themselves over the life of the loan.

The result was that they turned a forecast fall of $96,000 in their cash balance into a $123,000 increase.

The problem: Everest’s cash flow forecast shows a 60-day time lag between sales and receipts

 

The solution: reduce payments and bring forward receipts

       

• This is a hypothetical example for illustrative purposes only and does not represent any particular individual or company.

 

• Important information
  As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb)