And another question about liquidity...

[finknottle]

We've heard alot of dire talk about companies not being able to make payroll because they won't get the loans.

 

As a small business owner, I realize I do things differently: I keep enough cash on hand to make payroll. Sure, I could be making interest on that money, but it's not a lot and having a buffer gives you piece of mind. The thought of borrowing money for anything other than actual expansion is an anathema.

 

So how common is it really for companies to borrow to meet payroll? Certainly it may happen on occasion, but you should be able to predict shortfalls well in advance if you are running your business right. Do most companies regularly try to function with no money in the bank, to maximize the return on their cash? Seems dangerous to me...

 

Anybody have any experience?

[IDBillzFan]

We've heard alot of dire talk about companies not being able to make payroll because they won't get the loans.

 

As a small business owner, I realize I do things differently: I keep enough cash on hand to make payroll. Sure, I could be making interest on that money, but it's not a lot and having a buffer gives you piece of mind. The thought of borrowing money for anything other than actual expansion is an anathema.

 

So how common is it really for companies to borrow to meet payroll? Certainly it may happen on occasion, but you should be able to predict shortfalls well in advance if you are running your business right. Do most companies regularly try to function with no money in the bank, to maximize the return on their cash? Seems dangerous to me...

 

Anybody have any experience?

I have a couple of customers who do about $40-50 million, coupla hundred employees, and they all keep a large credit line available that they tend to dip into into at the end of the month to cover payroll, etc., depending on how their cashflow is going. They also tend to have significant overhead, so if one of their customers doesn't pay them in a timely manner, they'll transfer funds to cover costs, and when they get paid they typically transfer it back.

 

It's a very common practice among larger companies.

[finknottle]

I have a couple of customers who do about $40-50 million, coupla hundred employees, and they all keep a large credit line available that they tend to dip into into at the end of the month to cover payroll, etc., depending on how their cashflow is going. They also tend to have significant overhead, so if one of their customers doesn't pay them in a timely manner, they'll transfer funds to cover costs, and when they get paid they typically transfer it back.

 

It's a very common practice among larger companies.

 

So are you saying they don't keep cash-on-hand to cover forseen expenses for some window forward? Or that they play it so close that they dip in a good portion of the time?

 

Certainly keeping a credit line open makes sense, but wouldn't you only want to use it for unforseen expenses and payments not received? Again, I realize my business doesn't project to theirs, but mantaining sufficient cash for the next three weeks forward is not hard and I don't feel I'm losing out on any appreciable return had that money been invested.

[DC Tom]

So are you saying they don't keep cash-on-hand to cover forseen expenses for some window forward? Or that they play it so close that they dip in a good portion of the time?

 

Probably both. If your overhead's $10k a month, keeping $10k in cash to cover expenses is realistic. If it's $100k, keeping that much cash starts getting a little awkward.

 

When you're GM, and your monthly overhead runs eleven figures, you're not keeping that much cash.

[IDBillzFan]

Probably both. If your overhead's $10k a month, keeping $10k in cash to cover expenses is realistic. If it's $100k, keeping that much cash starts getting a little awkward.

 

When you're GM, and your monthly overhead runs eleven figures, you're not keeping that much cash.

More specifically, in the professional audio/visual world, an integrator might win a project valued at, say, $2 million to purchase and install about a million dollars or so (their cost) of hardware (projectors, screens, amps, speakers, videoconference and audioconference equipment) and furniture (conference tables, podiums, etc.). When they place the orders, they do it off a line of credit from the manufacturers, usually at net 30 (though mfgs. typically have a net 15 early-pay incentive of 3%). The integrator may get a deposit up front, but it's usually no more than 20%, which is not near enough to cover the million+ dollars in hardware they're taking in as overhead for which they can not invoice their customer again until the equipment is shipped to the job site. That could be upwards of 45-60 days later depending on the construction schedule.

 

They simply won't have that extra $600,000+ lying around, especially because that's not the only job they have in house. And that doesn't even begin to cover payroll, payroll taxes, insurance, etc. for that month.

 

They absolutely must have a line of credit to keep things moving.

[Lurker]

So are you saying they don't keep cash-on-hand to cover forseen expenses for some window forward? Or that they play it so close that they dip in a good portion of the time?

A lot of companies use cash management products like sweeps and ZBAs (zero balance accounts) to move idle money into overnight or short-term interest-earning investments. If it makes mores sense to draw on a credit line for a day than shift investible funds back into the payroll or other opererating accounts, they may do it that way. But it's not a good practice to follow repeatedly, more of an exception decision.

 

The bigger worry I'd see from not having extra capacity on a credit line is for things like buying inventory or funding accounts receivable. If firms have to cut back on that financing need, that goes right to production/sales, which feeds into slower GDP.