Cash is King - The Importance of Liquidity
The current credit crisis and problems concerning the major banks around the world have highlighted the fact that a business can increase turnover, generate profits but get into difficulties due to cash shortages. The business module for certain banks has and is based on getting funding from other financial institutions due to the lack of customer deposits. As soon as the other financial institutions decline to assist, they are no longer in control of their own destiny.
Like many businesses Turnover is chased, Profits are generated but Cash is short.
A phrase that I have used for years with clients is:-
- Turnover is Vanity
- Profits are Sanity
- Cash is Reality
It is all very well having nice premises but if you can't afford to pay the mortgage,then you have problems. What will happen to your business if the bank does not renew your overdraft or your main creditors reduce your terms of trade or worse go bust. How will you finance your current working capital?
All businesses can take some steps to try and protect themselves.
- Monitor your cash by preparing a cash flow budget and review on a regular basis. It is essential to review actual performance against the forecast.
- Undertake credit checks on new clients to ensure they are financially stable.
- Get deposits where possible for materials and large purchases so you limit your exposure.
- Do not chase business or contracts that you are unable to finance
- Borrow from the bank on loan not overdraft, so that you have a term committment and understand your monthly payments.
- Invoice as soon as possible for monies due to you.
- Chase up outstanding debts as soon as the are due.
Credit may be harder to obtain over the forthcoming months, so be in control of your own destiny or seek external support so that you fully understand your liquidity and profitability.
Karl Bushell
A1 Group
www.a1-group.co.uk
Date: 15/04/2008
Category: BUSINESS EDITORIAL