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How long can a company lose money without running out of cash?

Only when the tide goes out do you discover who’s been swimming naked.
– Warren Buffet

Is the Houston economy’s metaphorical “tide” going out?  It’s hard to say, but some businesses are definitely feeling a bit “naked” these days.  They may not even realize the peril they’re in because they still have positive cash flow despite the fact they’re losing money.  This begs the question…

How long can a company lose money without running out of cash?

The simple answer to the question “how long can a company lose money without running out of cash?” can be found by using this equation:

Liquidity / Burn Rate = Timeline

… where Liquidity = the amount working capital of the company that can be converted into cash

… and Burn Rate = the amount of cash spent each month

This formula can be very helpful in projecting how much time you have to find a solution to turn things around.

Let’s assume you have \$1,000,000 in working capital and are losing \$100,000 a month.  According to the formula, you will only have 10 months before you run out of cash. The trouble is, you’ve predicted the downturn to last up to 18 months.

Now what?

Managing “Crisis”

The character for the word crisis in Chinese is actually comprised of two other characters  – danger and opportunity The key to surviving, even thriving, during times of crisis is to find the opportunity amidst the danger.

Your first answer to the crisis was probably to cut costs.  Most likely, you’ve already done as much of that as you can so let’s look at some other ways to weather the storm.

Improving Productivity

One way to stretch your working capital is by improving productivityProductivity can be defined as:

Productivity = Throughput/Resource

Examples of throughputs are hours worked, widgets produced, etc.  Resources are people, materials, etc.

In order to improve productivity you must:

1. Understand the processes – How do we do things around here?
2. Identify and measure drivers – What’s really driving results?
3. Identify bottlenecks & inefficiencies – What’s going wrong?
4. Simplify the process – What can we cut out?
5. Communicate to everyone – Everyone needs to be on the same page.
6. Tie rewards to results – What gets rewarded gets repeated.

Improving Cash Flow

If you’re worried that you’ll run out of cash before things turn around, it’s time to focus on

Cash conversion cycle = DSO + DIODPO

Where:

DIO = Days Inventory Outstanding

DPO = Days Payables Outstanding

Some of the ways to reduce your Cash Conversion Cycle are:

Lastly, you must measure cash flow on a daily, weekly, quarterly and annual basis.

You can’t manage your cash flow if you don’t measure it!

Want a step-by-step guide to improve your cash flow?  Download our free tip sheet 25 Ways to Improve Cash Flow.

In order to measure cash flow effectively, you’ll need to take a look at your cash flow statement. On the cash flow statement, you’ll see three different type of cash flows:

Operating

Your operating cash flows focus on the measurement of cash generated by your operations.  This is the most important cash flow type to look at when experiencing a positive cash flow and a negative net income. Because a positive cash flow is able to maintain current operations and potentially grow the operations, operating cash flow could be the main determinant in why you’re running out of cash in a positive cash flow period. If you’re experiencing this, you either are hiring personnel and can’t avoid it, OR you’re experiencing collections problems and/or have poor debt structure.

The bottom line of your operating cash flow determines whether your company will make a profit or not.

Investing & Financing

This type of cash flow deals with the cash flowing between the firm and its owners. For example, any technology investments or meeting requirements (payroll, etc.) would be considered investment cash flow. This type cannot be controlled like the operating cash flow due to the investment of necessary items.

If you’re experiencing this in your investing cash flows, look at your assets to determine if each asset is absolutely needed. The solution to an investing cash flow problem would be to sell some of these assets. In addition, consider raising capital to get over the hump.

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Return on Investment

Return on Investment is a useful tool to understand, analyze, and compare different investment opportunities. Return on Investment or ROI measures the efficiency of a specific investment by revealing how net earnings recover the cost of the original investment. Have you ever wondered if the result of your investment was really worth the cost? Well, a return on investment model looks at the inputs and assumptions of the ROI equation to determine if the benefits of the investment are worth the costs. Following are the ROI model tools you need to analyze ROI and improve ROI. Then you can determine the value of your investment:

Analyzing Your Return on Investment (ROI)

The first step is to identify and analyze overall benefits from the investment. For different financial situations, the percentage of returns may vary according to what the decision-makers consider to be gains or losses from the investment. As long as you are consistent with how you classify benefits of the investment, you should be able to effectively use your calculations for analysis and comparisons. Focus on benefits which are measurable and attainable. Measure and evaluate tangible benefits to improve ROI percentages.

If the benefits appear significant, then the next step is to identify and analyze associated costs of the investment. Costs are simpler to identify than benefits. Make a list of costs and then breakdown the costs into groups to better categorize the origination of costs. This will enable you to understand where the majority of costs are coming from. Are there any costs that appear inflated? Can you easily reduce some costs? Are there costs that could be eliminated completely? These questions will help you analyze expenses of the investment. Keep in mind that the cost of an investment includes not only the start-up cost, but also the maintenance and improvement of the investment over time.

Improve Return on Investment

To improve the return on your investment, business managers and directors should develop comprehensive and realistic projections for both revenues and expenses. Effective planning will account for unexpected expenses and underperforming sales revenue. By analyzing projections, you should be able to develop strategies to reduce costs and increase sales.

If you don’t want to leave any value on the table, then download the Top 10 Destroyers of Value whitepaper.

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Blue Chip Stocks Definition

Blue chip stocks are long-established, well-known companies with reliable earning power and growth over time. Following are common characteristics of blue chips:

• Sell diversified and high quality products and services in a variety of geographic locations
• Competitive advantage in the market through their reputation and cost efficiencies
• Steady consumer demand for products and services because they are not affected by changing technology or changing consumer tastes
• Long-term share price returns
• Consistent dividend payments to common stock holders with a tendency to increase dividends payable to each share
• Solid balance sheets with secure assets and minimal debt levels allow them to borrow money at a lower cost than competitors
• Excellent credit ratings
• Known to overcome operate profitability in economic downturns
• Large and steady revenue streams and market capitalization

Benefits of Owning Blue Chip Stocks

Blue chip stocks can be some of the best investments in the market because they provide consistent dividend payments and long-term price returns. While many consider blue chips as boring and outdated, these stocks have consistently demonstrated growth and profits.

The Dow Jones Industrial Average

The Dow Jones Industrial Average provides a list of the thirty most prestigious blue chip companies around the world. Editors of the Wall Street Journal analyze and select the list of blue chips for the Dow Jones. This list rarely changes because of the stability of blue chip stocks.

How to Invest in Blue Chip Stocks

Investors can purchase blue chip stock investments through any one of the following:

Examples of Blue Chip Stocks

Some examples of blue chip stocks include the following:

• Coca-Cola
• Johnson & Johnson
• General Electric
• General Mills

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3 Myths about Private Equity Investors

Myths about private equity can inhibit entrepreneurs from pursuing business opportunities and making rational decisions.  Private equity financing is a complex decision for business owners.  These owners should analyze other financing options and goals for future growth of the company before making important investment decisions.

3 Myths about Private Equity Investors

Here are three myths about private equity investors

Private equity is not intended to be a win for the investor and a loss for the business owner. The investor’s best interest is that the entrepreneur grows the business and increases its value so that BOTH sides win.  Private equity investors are not profitable if the value of the company depreciates.

Many business owners perceive private equity investors as greedy and manipulative in cutting them out of the success of their companies.  However, most of the time these perceptions arise when entrepreneurs:

• Lose control
• Blame private equity investors for the demise of their companies

As long as you leave at least half of the company in your ownership, as an entrepreneur, you will have control over your company to make important strategic decisions. Most private equity investors don’t want to run your company or take advantage of you. Instead, they just want to contribute to your business’s success.

2.  Private equity investors do not add value beyond their monetary investments.

While many people view private equity investors solely as sources of capital, this misconception is untrue. Most investors have expertise and experience in the various industries. Many experience come from past investments in successful companies and others from being entrepreneurs and chief officers themselves.  They have the know-how to advise businesses from an impartial outlook and to add value by bringing in fresh ideas and perspectives.

Investors also have a network of connections to help companies advance and develop strategic partnerships. An investor with a good understanding of the company that he or she invests in will do more than just invest money into a business. They will help grow the company’s value in a rational and sustainable approach.

3.  Once a private equity investor is ready to exit his or her investment, the business owner has to sell the company or take it public.

Business owners are not forced to sell their companies or take them public once a private equity investor decides to exit.  Private equity firms usually invest in companies with a goal of exiting within five to eight years. The private equity firm’s partners expect liquidity at a certain point in time. As a result, the firm cannot hold on to all investments forever. At this point, the business owner has several choices, including raising capital from a new private equity investor or a new partner

Avoiding these common misconceptions will allow you to focus on the positive benefits. Therefore, you can make better decisions about private equity investments.

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