Question

You are the CFO of a small startup company. You have just completed a six-month cash flow forecast and determined that the company will incur a one-month negative cash flow, two months from now. What specific policy actions can you undertake with your working capital accounts to help mitigate this expected shortfall?

Outline the specific working capital actions that you recommend taking to mitigate the cash flow problem.

make sure the action can be implemented in the period required.

Answer 1

Being the CFO of a small startup company, the actions which would be undertaken to mitigate the negative cash flow problem were:

1. The vital component of the working capital is Accounts Receivable, so much cash can be generated if the credit period to the customer is reduced. Thus, first step would be to reduce the credit to the customers.
2. The old customer dues would be realized at the earliest, so that forthcoming negative cash flow position could be controlled.
3. The payment to the Accounts Payable or suppliers is another important aspect in the working capital of a company, so if we increase the credit taken form the suppliers or creditors would going to save a lot of float in the cash statement. Thus, the next step would be to increase the credit on the Accounts Payables.
4. Realization of cash from the short term investments so that the cash crunch would be eliminated in the times to come.

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