Tag Archives: cash flow

Liquidation – a valid way to build personal wealth?

An assortment of United States coins, includin...
Image via Wikipedia

A friend of mine in another country brought to my attention a company that is currently under voluntary liquidation – an act that reminded me of how often I’ve seen this tactic used as a convenient way of enriching oneself at the expense of others.

And isn’t enriching yourself at the expense of others in this way little more than fraud?

The problem here is that liquidation laws are necessary for a business in trouble to find a way to most fairly compensate all its creditors and close (or, in some cases, restructure) before it incurs further problems, resulting in even bigger losses for the creditors.

However, some unscrupulous people will start a business, build it over a few years to gain the trust of its suppliers and customers, and then at a point where the cash-flow starts to become problematic, put the business into voluntary liquidation and walk away from the debts. In the meantime, of course, they have paid themselves substantially in terms of salaries and bonuses – in effect, living extremely well off their creditors that are then left behind holding the proverbial baby.

While it is possible, in law, to go after these individuals and sue them for their personal assets to cover the delinquent debt, this is extremely expensive and, in order for the action to be successful you generally have to prove some form of wilful intent: always a tough thing to do, even when all the circumstantial evidence might point that way.

So, having accumulated a handy sum from this now-defunct business, they start again – looking for new victims. Mind you, some are brazen enough to start again in the same line, asking the same creditors for credit – and often, these creditors fall for it the second time, thinking that they will somehow be repaid from the profits of the new business…

And yet, these self-same businessmen will tell you that there are no victims here as their suppliers are (generally) covered by credit insurance and so will be paid out, while the credit insurer should be able to recover its money from the receivables (if it was that simple, why are they liquidating in the first place?)!

The fact is that credit insurance almost never covers the full debt, so the suppliers have a significant shortfall. On top of this, the insurance premiums invariably rise – the insurer has to covers its losses somehow, after all – and is also wary of that sector so withdraws/reduces cover for smaller, generally honest, businesses that then face genuine cash-flow crunches and may have to fold as well.

Victimless? Certainly not.

So, my question to you is this: do you believe this sort of action is legitimate, or should laws be framed to ensure that such action results in the forfeiture of assets by the liquidating party to cover the shortfall?

Reblog this post [with Zemanta]
Advertisements

Analyse This!

‘Analysis Paralysis’ is often cited as a reason for businesses failing to achieve their potential – too much time spent analysing an opportunity (or problem) with the result that the window closes and nothing is achieved. In fact, much has been written about this, with Google, alone, returning over half a million pages!

The problem is that many in business – particularly the more entrepreneurially-minded – use this syndrome as an excuse not to analyse anything, relying instead on ‘gut feel’ for all decisions.

However, analysis is a critical part of achieving maximum success in a business and there are many areas where this can be automated to a large extent, too.

One often-overlooked area of a business – because it is nowhere near as glamorous as Sales in many eyes – is Credit Control (also referred to as the Debtors’ or Accounts Receivable Department, depending on where you are in the world). And yet, it’s an area that can have a huge impact on the overall health of a company, and one where analysis should play an important role.

In the years BCC (Before Credit Crunch), of course, many companies effectively outsourced much of the decision-making to Credit Insurers, who would determine appropriate account limits for customers, and would chase up for the longer-overdue debt once it was reported to them. The company was paid out either way – by the customer or the insurer – so was less concerned.

This, of course, has all changed.

Credit Insurers are now a lot more careful with their level of risk and companies are having to re-evaluate their approach: do they accept lower credit limits and a consequent restriction to their business, or do they ‘self insure’ to maximise their opportunities?

By analysing their customers’ payment patterns over time, companies will develop a much better understanding of their customers, being better able to assign appropriate credit limits, while also developing an early-warning system of impending trouble.

What’s more, utilising this information in cash-flow forecasts will provide a far more accurate picture of expected income for a given period than the ‘rule of thumb’ that so many companies seem to still use. And, of course, this should feed through to enable companies to give accurate information to their creditors as to payments due, and take maximum advantage of any early-settlement discounts that may be available.

It all comes down to understanding your business more thoroughly. If nothing else, the economic conditions of the past couple of years should encourage businesses to pay a lot more attention to the fundamentals, and that will be good for everyone going forward.

Reblog this post [with Zemanta]

Cash Flow or Bust!

Notice of closure attached to the door of a co...
Image via Wikipedia

The recent furore over large companies asking to reschedule debt repayments has once again highlighted the issue of cash flow, and how important it is to even the largest businesses.

The companies are not really bankrupt – in one recent example, a company with debts of an estimated $60 Billion has these amply covered by an asset portfolio which, even in these depressed times, is reckoned to be worth around $100 Billion. Why, then, is it trying to put back the payment of some $3.5 Billion due this month?

The simple answer is that it doesn’t have the free cash available… Business plans were built on an expectation of a certain level of trading – primarily in property sales – which simply dried up with the global economic crisis. Without the sales, the company quickly found itself running short of cash and so unable to service upcoming debt repayments. Unlike governments around the world, of course, a company can’t simply print more money to get it out of a hole (an unwise move for governments that seldom seems to stop them, though!). In the absence of being able to improve its sales to generate cash, it must either borrow more money to repay old debts, or delay the repayment of those debts. And this is what the company in question is now trying to do.

The fact is that many more businesses fail through cash flow problems than for all other reasons combined – an estimated 80% of failures, in fact!

So how do companies get out of looming cash-flow crises?

The answers, of course, vary enormously with the type of business, but a few general items cover the vast majority of situations:

  • Boost sales – this is the most common response, and can be helpful. However one needs to ensure that it is not a case of delaying the inevitable: that sales are not done at such low [special] margins that the business cannot cover even basic costs. Reducing profitability for a short period to get extra sales can help cash flow, but reducing it to a point of significant loss is potential suicide.
  • Manage Inventory– this is a more complicated area and one not fully appreciated by many businesses. One needs to not only reduce inventories to a level appropriate to the business and lead times, but also to manage the ordering process to stop islands of excess building up (look at weekly sales, instead of monthly, and you’d be surprised how the picture can change, for example).  Reducing inventory by 3-4 days is like putting an extra 1% on the bottom line, and lower stock means lower payments which helps your cash flow, so systems should be in place to ensure stock doesn’t age, and that ordering is appropriate to the business run rate.
  • Reduce Receivables – another potentially complex area that is often neglected in the interests of “keeping customers happy.” If you are known as a soft touch, then your customers will stretch your payment terms to pay those that are more demanding (or financially beneficial). Instead of sending a month-end statement and hoping the money will roll in, send it at the beginning of the month and have credit controllers call your customers before mid-month (when they’re quiet anyway) to ask about any possible queries on the statement. Simply removing these queries proactively will reduce your DSO noticeably in most cases. Of course, there are many other techniques, too.
  • Reassign Assets – although this might not help a short-term cash flow issue, managing your assets properly can help prevent cash flow problems. Do you really need to own your Head Office, or is it an ego thing? Do your vehicles, or IT systems, need to be owned or can you lease them? In many cases you’ll find that the benefits of leasing or renting are significant in terms of cash flow and they have tax benefits, too.

All of these issues can play a significant role in helping you manage cash flow better, and there are more, besides, depending on the nature of your business.

The real point, though, is to run your business in such a way as to avoid getting into this sort of trouble in the first place – cash flow problems can literally put even the most profitable company out of business.

Enhanced by Zemanta