Storm of Bankruptcy
Bankruptcy is something that often hit the headlines during the COVID-19 Pandemic. The world was place on high alert as we all watched household names publicly declare bankruptcy. No matter how frequently the headlines flashed over industry mammoths like J.C. Penny’s, Brooks Brothers and the like had to change their tune. For many investors this was not familiar territory.
We have a podcast episode that you can listen to where some of the analyst review the importance of working capital cycle and what role it plays in a business operation. (Listen free here)
What is working capital?
Working Capital Cycle (WCC) can easily be defined as the amount of time that is needed to pay your operating expenses from your short term sales, revenue or assets. This is similar to a current ratio.
Others such as Corporate Finance Institute (https://corporatefinanceinstitute.com/) would define working capital cycle as:
The Working Capital Cycle for a business is the length of time it takes to convert the total net working capital (current assets. They are commonly used to measure the liquidity of a less current liabilities. A company shows these on the) into cash.
XYZ Corp. has monthly operating expense that are $400,000. As part of these normal operating expenses are inventory, payroll, lease, utilities etc.
XYZ Corp. has a government contract that pays $450,000 every 45 days for work completed. They also have $400,000 on their balance sheet that can be liquidated to pay their operating expenses. Unfortunately the liquidity event will take 45 – 90 days due to the type of assets on their balance sheet.
In this example XYZ has a Working Capital Cycle of 45 days. In this event they would not be able to meet their monthly requirements by a 15 day delay.
In this small example we can see how similar scenarios have taken place for other companies who have filed bankruptcy during the pandemic.
There were a number of companies that were not able to pay their lease agreements or other operating expenses after 45 days of the pandemic. This is what ultimately led to so many bankruptcy filings.
Why is this so important?
The pandemic has showed us that no matter the size of your industry or company you can still be pushed out of the market.
Households in America are taught by Suze Orman and Dave Ramsey to always have 6 – 12 months of your monthly expenses saved in a savings account as a rainy day or emergency fund. This is especially beneficial if someone is released from their employer. This would mean that they now have the ability to seek proper employment without wondering what will happen in the short term. The saving account or rainy day fund allows them to seek the right type of employment without the pressure of paying their regular living expenses.
So the question is why did some of these Fortune 500 companies not have access to a rainy day fund or operating expense account that they could rely on for 6 – 12 months of the pandemic?
Do you need working capital?
If you or someone you knows is in need of working capital, we can refer you to speak with a member of the capital team by submitting at http://barneyfordcapital.com/