You might be in a growth phase of your business. Growth always requires cash and cash is generally at a premium. Further, there are some liquidity traps to be avoided as you grow. Here’s 3 to watch out for: 

1) Excess build-up of accounts receivable 

It’s normal for your receivables to increase when you grow. However, if you’re not careful, the build-up can be excessive if you also experience a slowdown in payment from your clients. For every $1 million in revenue, 1 days’ worth of AR is about $2,800. If you’re a $10 million company and you have a slowdown of 10 days in your collection period on AR, that’s $280,000 that is sitting in AR that could be sitting in cash. Wouldn’t you rather have all or a substantial amount of that in cash? 

To monitor this, calculate your accounts receivable turn. Take annual revenue divided by AR balance to come up with your receivables turn. To calculate the turn in days, take 360/AR turn. For example, $1 million/$200,000 AR balance is 5x turn. 360/5 = 72 days sales in AR. 

Read more.