The cash conversion cycle can send you broke.

How can a profitable business go broke?

If a good business is starved of cash, it will go broke, no matter how profitable it might otherwise appear to be.

Businesses need to budget for inventory, overhead, debtors (offset by cash sales, and credit from suppliers) in order to survive.

The period of time between paying for costs and receiving cash from sales is the cash conversion cycle of a business, and is usually measured in days, weeks or sometimes months.

Inadequate planning for the cash conversion cycle period is a major cause of business failures. Thriving sales creates a strong demand for the resources required for the product or service being sold. 

This includes such resources as inventory, debtors, selling and distribution expenses, overhead and salaries.

If the payment for resources is required before the sales are banked, then cash has to be injected into the business from available sources, such as additional loans, or shareholders kicking in, or the even sale of a surplus asset. 

If not enough cash is available to fill this gap, the business is bankrupt.

One of the assets which may be suitable for release to generate cash is the Accounts Receivable ledger, the combined value of money owed to the business by its customers.

The process of selling Accounts Receivable is described as Debtor Finance, Invoice Finance or factoring. The type of facility should be matched the character and size of business.

When the timing of cash flows is hampering a business, Invoice Finance can be a particularly useful technique for allowing the business to move forward more quickly. ..continue the conversation here.. or you can make a Fast Application here.