How to Correct Cash Flow Mismatch: Strategies for Stability

When short-term funds are utilized for long-term purposes, it can lead to liquidity problems and financial instability. Here are some ways to correct this situation:

1. Refinance with Long-Term Debt

• Replace short-term debt with long-term debt by refinancing existing obligations. This can involve obtaining a long-term loan or issuing long-term bonds to retire short-term debt.
• Consult with financial advisors for restructuring short-term borrowings in accordance with RBI norms.

2. Sell Non-Core Assets

• Liquidate non-essential or underutilized assets to generate cash that can be used to repay short-term debt.
• Selling assets that are not critical to operations can improve liquidity without impacting the core business.

3. Increase Equity Capital

• Raise additional equity capital through the issuance of new shares or equity investments from shareholders.
• Equity capital provides a permanent source of funding for long-term uses without fixed repayment obligations.

4. Utilize Asset-Based Financing

• Use asset-based financing, such as LAP or WCTL, to raise long-term borrowings for infusing long-term working capital margin in the business.

5. Seek Professional Advice

• Consult with financial advisors, accountants, or business consultants to develop a comprehensive plan for correcting the misuse of short-term funds.
• Professional advice can provide valuable insights and expertise in implementing corrective measures effectively.

We, at Capflow Consulting LLP, understand the nuances of RBI regulations and healthy working capital management practices. Join our Smart SME series for practical solutions and insights to improve financial literacy and raise optimum finance for sustainable growth.

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