insurance company balance sheet analysis
In Part 1 of this series established a typical scenario of cash flow for a small business. The order was good with 40% profit margin, but through Course production and delivery of our company was deeply in the red and having to fund all labor and materials. No mistakes were made, but that was just part of doing business.
Before anyone in the analysis of our cash flow challenge, we'll take our history of the small company a step further and see what happens when an order of the land great.
The problem with Big Order
As you remember, our small business is used to make $ 10,000 in sales each month. We have learned to handle and have an adequate supply of cash and financing in place to do business.
Suppose now that our business has an order of $ 100,000, ten times our normal monthly amount. This is a great problem to have, but also can be very dangerous to a society if do not manage it right.
The first challenge is that we probably need to negotiate some extra time to comply with the contract. Let's say the client agrees to deliver three months instead of the usual.
Now we have to align more staff and bigger contracts with our suppliers. The most likely, given that our suppliers are not accustomed to such large orders from us that will want some form of payment to ensure order. That's a little more we have to find money up front and more resources.
At the end of the day, ten times the orders of the means ten times the funding. Our small business is suddenly faced with funding of $ 60,000 this month instead of the usual $ 6,000, and the term will be from 90 to 120 days instead of 30. That's going to raise some eyebrows in the bank safe. Do we have the credit score to justify that amount? It may well be able to get it, but not without giving further information to the banker. They want to see a business plan with things like a copy of the order, insurance, credit and background check on our new large customers. All things that can be provided, but the situation should be managed.
And finally, what if something goes wrong and we fall behind in production? In our example of small businesses can no longer be able to rescue our company using our personal finances. In a large company, the same can happen. If our project goes wrong, and either the bank or our client loses faith in our ability to complete the order could be in a position of having to lay off staff or closing the business altogether. More than a great company with a healthy balance has declared bankruptcy as a result of the variable cost of the poor, cash flow management.
Abstract
Get a large order is not a disaster, indeed a cause for celebration. However, an unusually large order requires management close to becoming a success. Before jumping in to take some time to resolve the likely scenario of cash flow to ensure that your business can handle. Large orders are great if well managed, just be prepared for their financing options and business plan.
Part 3 discusses our scenario cash flow and sets out some practical management tips for managing cash flow business.
About the Author:
Daryl Cowie has shared management tips with 1000s of people in over 30 countries around the world. His mission is to help you and your company turn business opportunities into business realities. Sign up for his free business management home study course at http://FreeManagementTips.com
Article Source: ArticlesBase.com – Tackling the Cash Flow Problem – Part 2 of 3
Squawkbox: On The Radar 02-01-08
