By Alex Vuchnich, CPA, CFE
For cash-strapped companies, increasing cash flow is essential for staving off creditors and threats of involuntary bankruptcy actions. Companies struggling to increase cash flow tend to look to some common places for increasing operating cash.
The familiar suggestions are to increase receivables collection rates by billing more frequently and earlier, and by offering discounted terms for early payment. Along those same lines, typically organizations will attempt to extend payment to vendors to the maximum term allowed – or even past that if management believes it won’t adversely affect the company’s credit rating or position. However, there are some more uncommon sources for cash that should be considered when the credit crunch hits.
Selling property and equipment is one such source, however many organizations fear this because often this might mean selling property and equipment that are needed to continue the revenue-generating operations of the business. One workaround, though, is the company might be able to enter into a sales-leaseback transaction that enables the company to get the immediate cash infusion from the sale and still be able to access the property and equipment for operating purposes. For companies that are struggling to find financing for working capital needs, this provides another avenue of financing that would otherwise not be available.
Another source to consider which, could be readily available given the time of the year, is the company’s income tax refund. Companies that have paid in estimated taxes throughout the year, but are now showing an operating loss, can recover those amounts by filing for the refund. Even businesses operating as pass-through entities can take advantage of this by accelerating filing of the shareholders personal returns and obtaining the refund there. The individual shareholders can then use the refund to make additional capital contributions or shareholder loans to the business.
The last source of operating cash is a commonly used source that should be avoided at all costs. Many businesses will hold back payroll taxes that should be remitted to tax authorities and use these as an operating loan. The justification for this is typically something to the effect of “it is a leveraged loan to get the business through a rough patch and once things are better, the taxes will get paid back.”
The problem is that the employees’ portion of payroll tax withheld are trust fund taxes which means not only will the business be liable for the nonpayment but also for any responsible parties – which typically are the owner and anyone with signature authority over the checking account. Avoid this one no matter how tempting it may appear at the time. Find or borrow the cash from somewhere else. If you are that confident in the business’ ability to continue operations, then borrow the money personally from a bank.
About the author:
Alex Vuchnich, CPA, CFE, is the developer of Controlzkit, an internal controls anaylsis tool, and he shares his perspective on how audit and accounting theory, technology, and professional ethics interrelate to create forward-thinking, profitable firms.