Margin Analysis & Correction

In an existing business that is struggling with cash flow and profitability, it’s critical to identify where the bleeding is coming from and find a way to stop it fast and permanently. Except in specific start-ups or unusual circumstances, we should not tolerate negative cash flow and cover it with other capital means. Capital can be used to grow the business and add more value than temporarily covering losses that could be corrected in other ways.

Capital Structure

With appropriate margins, the most efficient capital structure can be developed. Outside equity capital is typically the most expensive form of capital, so one should first optimize the natural cash flow in the business to minimize how much capital will ultimately be required or consumed. Appropriate levels of low-cost debt financing should be utilized only where necessary, and prior to outside equity, to ensure the business is using capital efficiently.

Optimize the Natural Cash Flow

Minimize investments necessary in working capital by reducing overall inventory and improving turns, reducing/improving vendor accounts payable terms and being conservative providing terms to customers. Also look for opportunities to create working capital by accelerating payment terms with customers, requiring deposits or progress payments.

Traditional Financing

The next lowest cost form of capital is typically traditional banking/lending arrangements supported by the companies’ assets, including customer accounts receivable, inventory, equipment and facilities. This includes working capital credit lines, equipment loans or leases, and building mortgages, leases or sale-leasebacks.

Equity Capital

Outside equity capital, including all forms of subordinated debt or equity, is usually the most expensive form of capital for a manufacturing business, so it should be used wisely and sparingly and for the most beneficial use of funds, considering all opportunities for the capital.