Surviving the Recession Mini-Series

Episode 02. 1st Key Factor - Financial resources and liabilities

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Kim Radok 27 April 2020

“A business without cash, is not a business” said an accountant many years ago.

Accountants and insolvency administrators have also said over the years, that cash is the life blood of a business. Like a human body dies when there is little or no blood left in it, so does a business when it runs out of cash.

Today we live in a world which can and will drain our business and personal cash resources. The truth is, that in most situations in the future, many people will want your cash, whilst others may be unwilling or unable to give you cash in return.

Moving forward therefore, your first responsibility is to protect your cash resources, either those in the bank or available by accessing cash via finance options.

In the case of any trade debtors, make sure your business is paid as quickly as possible is at the top of the list. To facilitate this objective, eliminate the causes of mistakes and ensure all invoices are raised correctly. These two key factors allow debtors to use as an excuse to slow pay or avoid paying your invoices. In certain cases, you may wish to offer a discount for early payment. Take care how you frame the offer for a cash discount. There are always other factors which may come in to play if the offer is put in the wrong fashion and accepted by your customers.

If you have already obtained finance from creditors via loans, supplier accounts, or any other legal sources, paying off these creditors within terms, or even ahead of time for a discount, is essential.

In particular, I believe overdrafts are just time bombs waiting to go off for many business people. In many cases and quite reasonably, they are used as a supply of short-term funding for seasonal payment factors. Unfortunately, they often become a lifeline for funding day-to-day operations which is not what they are intended for or will be accepted long term by your bank.

It is wise to remember what happened in the GFC regarding business overdrafts. Many business owners at the time were called to meet their bank managers during the early stages of the GFC. On arrival, they were told in no uncertain terms to:

  1. clear the debt;
  2. provide security; or
  3. sign the personal loan agreement handed to them for their signature, on the spot.

On review of your situation, you may identify there is no possibility that your business will survive long enough to trade your way out of its liquidity situation. In that case, you would be wise to close the business down, and I stress, in a responsible manner and within the law.

You may be able, if experienced enough and you have access to cash, to complete the task of winding down your business in a responsible manner and protect your business reputation. This will allow you to start again in the future if that is your desire.

If you are in doubt however on your ability to complete the closure of your business, or lack sufficient cash resources to clear all debts, you should seek help from a reputable firm or professional.

This concludes the first key factor of survival, financial resources and liabilities. After a short break we will resume the next key factor, your reputation.

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