Short-term liabilities or debts include those aspects where businesses owe money to outsiders or their employees that have obligations to be paid within a year. Accrued payroll expenses and wages, accounts payable, short-term borrowings, lease payments, taxes payable, etc. are a few examples of short-term debts. When the amount of short-term debts exceeds total amount of current assets, a company’s financial position is not considered sound and management needs to take immediate action to rectify the course.
How can these short-term debts be Paid off?
Balancing Cash Flows:
While there is no escape from debts, ensuring steady cash-flows can maintain a healthy financial position. With sufficient cash in hand, paying off bills becomes easy and can be paid on time. This gives confidence to keep the cycles running.
Businesses find it easy to finance a debt through short-term loans or overdrafts from banks. While this is not a good sign to clear debts by incurring new loans, businesses can do this by paying off loans that carry high interest rates with loans that carry a lower rate of interest to reduce some of the burden. This is also known as transferring of debts from one head to another. But, it is advised not to use short-term borrowings to finance long-term loans as it will eat into your working capital needed for operations.
Accounts Receivable Financing
A businesses best use of funds is to use short term assets to pay short term liabilities, like increased payrolls or increased inventories. Longer term debt should be saved for capital improvements that have a longer horizon on return.
Accounts receivable are often a businesses sore point because their customers like many others do not pay on time. Delays in payments from their customers is the basic reason why businesses incur more debt and have cash flow issues. But now with a reliable invoice factoring company in Los Angeles, most businesses here and many in other states are getting their unpaid invoices financed and utilize this amount to pay off debts. Companies in other states often use accounts receivable financing companies in larger cities like Los Angeles because they have more experience with larger varieties of companies due to the larger Los Angeles’ size and range of businesses. By resorting to accounts receivable financing, businesses, these businesses can immediately get funds right after completing the delivery of goods or services almost regardless of their industry due to the experience of larger factoring companies in the bigger cities. Therefore, with funds in hand, paying debts becomes easy.
No more waiting for payments as AR Financing takes only hours to get done, thus reducing the cash conversion cycle.
80% of business failures are due to failed finance and working capital management. Highlighting the importance of the current assets and liabilities, a good performing business can see downfall if its receivables fail to produce cash when required. As majority of cash is sourced from receivables, a/r factoring is a great option for businesses to manage their funds smartly. Excess debts are detrimental and businesses must handle them diligently.