Business requires liquidity to succeed - Business Works
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Business requires liquidity to succeed

by Phillip Bates, Principal, Phillip Bates & Co growing number of businesses are failing because of a lack of cash, according to Phillip Bates, Principal at Phillip Bates & Co who says that most SMEs going to the wall do so because of a failure of business liquidity.

Businesses talk a lot about revenue and profitability, but often more important than either of these is liquidity. This is a big issue at the moment.

Without strong working capital, it is hard for a business to move forward. There is a lot of truth in the business saying 'Cash is King'.

Most businesses which fail do so because of a lack of business liquidity expenditure on costs and capital items exceeds receipts from revenue sales and capital disposals.

Merely having just enough cash in the business is no guarantee of survival either. All it requires is the unexpected loss of a loyal customer or a bad debt or an unforeseen business expense and the fragile liquidity balance of a business can tilt dangerously.

business requires a financial cushion

A business is no different to a family in that it requires a financial cushion to give it much needed security and peace of mind in unstable times. We are just emerging from one of the most difficult recessions in history. The businesses that are coming through best are the ones which have managed their cash flow successfully. This meant keeping a tight rein on business expenses, maximising margins through efficiency improvements and maintaining customer bases.

Only by regularly looking at the numbers of a business can management track and anticipate trends around liquidity and working capital.

For example, a business may be carrying too much stock, much of which is sitting on a stock-room floor for weeks on end something that can drain cash from a business.

Another major issue for businesses, one that worsened considerably during the recession years, is customers looking to extend payment terms on suppliers.

There has been a lot in the press lately concerning the issues small and medium-sized businesses (SMEs) are facing with their payment terms being extended by customers. It is not uncommon to hear cases of businesses being told usually by larger customers that they are being moved from 30 to 60 or even 90 day arrangements.

Sometimes, a customer will tell a supplier that they can remain on their current payment terms but will need to give it an attractive incentive to do so. For example, a discounting of their invoice in return for prompt payment.

The Government has so far steered clear of measures to bring businesses into line, but Business Secretary, Vince Cable, did suggest that the time may have come for big businesses to publish their payment terms in order to bring about greater transparency.

I encourage clients faced with such challenges to ask three questions:

  1. Do you want the business? Having your payment terms extended will present you with a funding cost while you wait for payment;

  2. Are you better off concentrating your efforts on the clients who are happy to meet your existing payment terms?

  3. Have you talked to your customer to find out why they are looking to extend your payment terms? Are there underlying issues in their business in which case you may not want business of this kind or are they simply not valuing the services or products you provide them with?

    value is a really important word

    Value is a really important word in all of this. On more than one occasion, I have urged clients to pick up the phone to a customer who is threatening to extend payment terms and ask them, "Do you value what we do for you?"

    Without cash in the business, the company's liquidity is placed under enormous pressure. Poor accounting practices can mean a problem goes undiagnosed for many months, by which time it will certainly be more costly, but it may also be too late.

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