In my work I'm seeing an alarming trend. I'm not sure how wide spread it is, but if it is, this could mean rough times ahead.
I have to take you on a journey through a number of observations. First it starts with price. Due to competitive pressures, the financial value of the term "depreciation"has been discounted and disbursed to the customers. This probably started from someone working cash flow studies on EBIDAT
(earnings before interest,depreciation and Taxes investment models).And based on leveraging cash flow numbers eventually eroded the funds required by the company to reinvent itself. A resiliency number.
This creates the next situation, operating losses internally financed through
leaning on the trades. You know, getting cash and stringing out a supplier 60 days to pick up the "opportunity edge". Then all is well, for a while,then things slow down, all the inventory you've bought is sitting and you're already out 60 days with the supplier, now you're in it.
You do a quick calculation.
The Bankers would like about 150 % coverage in the working capital ratio
Something like Cash $ 50,000 , receivables $ 50,000, inventory $50,000 over liabilities say of trade payables of $ 100,000.00.
Your sitting out there, after financing losses from your discounted prices that is now creating conditions of insolvency.....
Cash $25,000, receivables $ 75,000, inventory $ 50,000. but the trade payables have ballooned to $ 300,000. Your working capital ratio is upside down.The creditors are calling.
What do you think most people do?