How is your firm going to use its cash?

I recently read an article by Dan Skelly, an Equity Strategist at Morgan Stanley, addressing whether businesses plan to return excess cash to shareholders or to invest cash in the business.

Skelly stated “With a stronger economy, management teams may have more confidence to spend on acquisitions, capacity or new projects.  The other key factor is higher financing costs.”[1]  He went on to emphasize that interest rates have been rising, creating greater urgency to complete transactions.

This brings up two interesting questions for smaller businesses:  Do you have the access to capital to invest in growth?  And will your firm be a buyer or seller in an expanding M&A environment?

Regardless of your answer to the second question, if you anticipate an increase in sales growth you can also anticipate an increase in receivables, inventory and payables.  Those components of working capital do not always balance, meaning that you may need more cash to finance the growth in your business.  If you have come out of the recession with a good balance sheet and strong relationship with your banker, turn to them now and secure additional working capital financing so you will be ready for growth.  If, on the other hand, you have struggled through the recession and are not certain your banker will be interested in extending more credit to you, you may need a more creative financing solution.  There are lenders who will look past your historical results if you have a strong growth story and a projection that makes sense.  These lenders will demand somewhat higher rates, but they can finance your growth and help you become “bankable” in the future.

If you would like to discuss your financing needs, please contact me through the Free Discovery Analysis section on the home page of this blog.

Next week I will continue this topic, the second question of your status in the M&A world.


[1] “Will Capital Spent Outshine Capital Returned?” Dan Skelly, Morgan Stanley Wealth Management newsletter February 2014.

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