2007-06-29 / Business
Cash is king when it comes to business
What's more important for your business in the short term than profits?
Companies can survive for years without making a profit so long as they don't run out of cash.
Amazingly, 80 percent of businesses do not prepare a formal cash flow forecast on a routine basis. Consequently, business owners often don't realize they need more cash until it is too late to make the necessary arrangements.
How do you avoid running out of cash? It starts by knowing if you are going to run out of cash. If the business is going to need a loan, it will be critical that you are familiar with the "Five C's" of credit: capacity (the ability to repay), capital (the investment that shareholders have personally made), collateral (a secondary source for repayment if the business ends up with insufficient cash flow to repay the loan), conditions (the reasons the money is needed, because of good or bad things happening in the business and/or the industry) and the character of the business owner.
Generally speaking, banks want to see cash flow capacity from the business that is 25 percent greater than the total monthly debt payments of the business. They want to see shareholder capital equal to at least 20 percent of the value of the assets of the business.
The business or the business owner must have assets that can be used as collateral. Often it is the business owner's home that is used as collateral.
Business conditions leading to the loan request are preferably related to business success and growth rather than a declining industry or poor financial performance. A company that manufactures iPods will be more attractive to the bank than a company that manufactures 8-track tape players (about half of the readers right now are wondering what an 8-track tape player is).
Unless you have deep pockets, the survival of your business means managing your cash at all times. It also means having a realistic cash flow forecast that looks out at least six months.