Are You Robbing Peter to Pay Paul?

Please forgive me for that very old adage, but alas, poor Yorick, I am that old!

Managing your finances will always be a zero sum game.  You have so much in liquidity, so much in working capital, and so much in liabilities, be they trade or long term debt.  Delaying one payment in exchange for favorable treatment of another does not do you well in the long term.

To my knowledge, you can only pay your liabilities with cash.  Yes, you might argue that bartering is an option, but that only goes so far.  Will your employees accept something other than cash?  Your suppliers?  Your bank or investors?

How to manage these financial affairs can make or break you.  Keeping one creditor current at the expense of other creditors eventually creates bigger problems.

It can be exacerbated by one creditor requiring money upfront.  You have a finite amount of cash and working capital.  If one creditor needs accelerated payment(s), you in effect are paying them at the expense of others.  If you see “gold in the hills” of importing, realize that these suppliers definitely require accelerated payment(s). 

Juggling these liabilities poorly can do irreparable harm.  Eventually other creditors will demand the same treatment.  If you could not pay them in 60 days, how will you pay some upfront?  Clearly by taking from other creditors.  Thus, the zero sum game.

First examine why you are in this position.  Clearly you do not have enough capital.  Did you start with enough and then incur losses?  Did you never have enough?  Did you invest in inventory that did not move as planned?  Are there some fixed assets not earning their keep?  Regardless, you need to figure out how to be profitable in order to satisfy your financial obligations.

What can you do?

1.  Find some long term cash.  Maybe it is a richer family member or a good friend.  You will still have to reward that person over time, but buying time may be beneficial.  For example COVID-19 has set most, if not all of us, back.  With the promise of a vaccine in the intermediate future, can you re-establish profitability.

2.  If you are profitable, maybe it requires better A/R collections.  Or A/P payments with credit cards to get an additional 30 days.

3.  Get more favorable long term debt.  If you have a home with a lot of equity, and/or if you have marketable securities, figure out how to convert some of that into cash.

4.  Finance with factors.  This accelerates your cash flow cycle, but it is expensive.  If it gets you over the hump, great.  But you probably should not make a steady diet of this financing.

5.  Give up partial ownership or control or some of your margins in exchange for working capital support.  If this frees you up to sell more, you can fix many of your financial problems.

Bottom line, make sure you have a vision and ability to be profitable.  Without the prospect of profitability, you are just throwing good money after bad.   Use your cash judiciously.