Liquidity, Cash Flow and Consumer Contract Financing

What exactly is liquidity and cash flow and how does it relate to consumer contract financing?  In a certain sense liquidity has to do with a business’s ability to convert non-cash assets to cash or to otherwise obtain cash to address specific obligations.  The prudent entrepreneur is always about the business of appraising current amounts of liquid assets as they relate to future cash flows.  Business owners who work directly with consumers, providing products and/or services may not be aware that the consumer notes which they hold, for example, in the form of a retail installment contract, may be in effect, a very liquid asset.

At the same time cash adequacy may be directly or indirectly affected by such things as seasonal business.  Year end financial data may or may not be representative of seasonal cash flow inadequacies.  Quarterly and monthly financials will probably be more helpful in analysing seasonal cash flow effects.
 
The analytically minded business owner can determine cash adequacy in several ways by closely examining the following trends.
 

• Cash flow created from the  harvesting of value from assets
• Cash flow created from operations minus cash payments needed to pay debt on dividends, principal and capital expenditures
• Cash flow created from operations (net income plus noncash expenses less non cash revenue)

 
Cash flow that can be created from the harvesting of the value of assets may not always be readily apparent. For example consumer receivables in the form of retail installment contracts can be sold as a portfolio and/or on a monthly basis so as to create cash flow for such things as the purchase of more inventory, or the payment of quarterly taxes, or addressing payroll issues, or taking advantage of discounts offered by suppliers, or for generating capital for an advertizing campaign etc.
 
The greater point is that liquidity for growth may be readily realized through assets that are in the form of consumer notes.  These notes can be readily sold to enhance cash flow and thus improve profitability.
 
This can be done on a regular and ongoing monthly basis, it can be done on an as needed monthly basis, it can be done through the sale of a large portfolio of consumer receivables (consumer contracts) and/or it can be done by some combination of all of the above.
 
In appraising financial flexibility the small business owner should evaluate how quickly their assets can be converted to cash, the capability of acquiring additional financing, the extent of nonoperating assets, and the ability to change operating and investing activities.  One of the helpful benefits of consumer receivable financing is that the conversion of a retail installment contract to cash usually only takes about twelve to twenty-four hours or less.
 
It is important to note that excessive financial flexibility may reduce the rate of return.  For example, while holding cash strengthens liquidity, at the same time it significantly reduces your rate of return on that cash.  Open lines of credit will ensure that capital is available when necessary; but, there is usually a cost associated with lines of credit.  Cash and open lines of credit will surely move the entrepreneur in the right direction, and are self-evident helpful tools when utilized correctly.  At the same time consumer contracts may not be readily recognized as viable routes to liquidity.  Consumer receivables can be sold, and can create cash flow to supplement such things as lines of credit and cash, or consumer receivables can be used to create liquidity when lines of credit and cash are simply not available. 
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