If you look at the world of housing finance, you will note there are two major problems for home borrowers. The first is cash for the deposit and later for repayments. Second is the lending value attributable to the home based on the property valuation at time of purchase.
In times of rising property values and cheap interest rates, if cash is a bit of a problem in the short term, negotiations can always take place to extend the existing loan. When property values fall and/or interest rates rise, the financial viability of the loan can be compromised by the home new valuation. As a result, an increased payment can be demanded and/or loan payments increased. If these demands are not met, the home loan can be terminated and the home lost.
In business, the same principles of profit and loss and finance valuations also applies.
The basis of any business growth or survival is CASH. We all know that. Whilst access to finance can also be important to a business, it is the cash in the bank account plus the physical assets it owns outright, that are the ultimate worth of the business.
When a business runs out of cash, even if it can access finance in the short term, with interest rates on the rise, doubt must start come into play on the business’s financial viability. When assets are fully owned by a business, there is collateral for the new finance to assist. However, this factor again is negatively compromised by the value and nature of the assets, as not all assets are treated equally.
Too often, as insolvency administrators have found, or a business owner tries to sell their business, many of the assets valued in the financial statements are unsaleable and/or have been inflated in value.
The problem in these cases has been the inflated valuation attributed to intangible assets or the valuation of paper valuations of assets have often been used to cover deficiencies of the business and to protect the interests of directors and senior managers.
When the crunch comes and demands start arriving to pay the business’s debts, this is when the real problems start. What eventuates is a situation where there is little money in the bank, finance resources are stretched and valuations in the financials are proven worthless. The consequence is then, all stakeholders in the business are damaged and reputations lost.
In the current business environment therefore, it behoves all business owners and managers to think about what is the real value is of their business. After all, your business can have many dollars of assets, and yet without CASH, a business is not a viable business.