Cash Flow;

Tweet

If you're not already watching your cash flow like a hawk, you should be. Small companies around the country are reporting a sharp increase in cash-flow problems, marked by aging receivables, slower collections, and growing difficulties with big-company customers.

To some extent, the problems may reflect cyclical factors: in an expanding economy, companies generally spend faster than they get paid. But this time around, the situation is being aggravated by the troubles in the banking industry. "Whenever the banks have problems, you get a general tightening of credit," says David Clark, partner in Riviera Finance, a factoring company located in Redondo Beach, Calif. "Large companies have trouble expanding their [credit] lines. So what do they do? They start holding up payments to their suppliers, and that has a ripple effect throughout the economy."

In the 1972 recession, Clark saw similar cash-flow problems among small-company suppliers to the aerospace giants. "We did a study and found that it was taking an extra 30 days to collect on any invoice for more than $2,500," says Clark. "So we told our clients only to submit invoices for less than $2,500. Sure enough, they got paid on time."

Of course, the current economy is not yet in a recession, but don't let that fact lull you into thinking that your cash-flow problems will take care of themselves. The banks' troubles are not going to disappear overnight -- which probably means that the situation will get worse before it gets better.