Updated: Jun 17, 2022
✦ “Banks will lend you money when you don’t need it”
“Banks will lend you money when you don’t need it,” vented a friend several years ago. He’d just borrowed $1m to buy equipment for his engineering business that he had started several years previously. His bank manager said “David (name changed) if you’ve got anything else you want we’d be happy to lend you up to $4m.” David looked at the bank manager and said, “It’s a pity you weren’t so helpful when I started the business and was trying to borrow.”
Another time I was in a business where a major purchaser had decided to delay its payments. A year earlier the business had restructured and refinanced. The purchaser’s decision was going to have a major impact on our cash flow and our ability to pay our suppliers and employees. I always let our bank know what was happening whether it was good or bad. After Rod (name changed) reviewed our previous 18 months finances he said, “John, the business has done everything it said it would when we refinanced it but you should have borrowed more at the time.” I said, “That’s no problem, just increase the loans now.” His glass eye twinkled ever so slightly as he said, “It’s not that simple.” I knew it was Rod’s glass eye as the other eye was still expressionless.
Why do businesses go broke?
The number one reason is that they run out of cash.
Why do businesses run out of cash?
There are three main reasons why businesses run out of cash:
1. They are not profitable in the first place
The lack of cash flow is a symptom of poor profitability or even losses. There’s a problem with the business model. Maybe like the farmers who buy watermelons from their neighbours for 50c each and sell them in the city at two melons for $1. They do a roaring trade but don’t make money. The answer isn’t a bigger truck.
2. They use short-term working capital to fund the acquisition of long term assets
Your working capital is used to buy long term assets like property or equipment. Avoid business cash flow issues by not using working capital to buy long term assets unless you’re absolutely sure you have plenty of cash that you won’t need in the near future.
3. The business grows too fast
This can result in a build up of inventory, and if you give credit to customers, a build up of debtors.
Three things to check regularly so you don’t get into a business cash flow problem
The cash that the business has available. Accountants call this free cash flow.
Your working capital burn rate – or the amount of working capital as a percentage of sales. If this is say 30%, then you will need $300,000 in extra working capital to fund an increase of $1,000,000 in sales.
Your sustainable growth rate. This is the rate you can grow without over borrowing.
Free confidential one hour session to help you improve your cash flow.*
*First 10 applicants. Available only at Success Tax Professionals Port Macquarie.
About John Clarke, Success Tax Professionals
John is the owner of Success Tax Professionals in Port Macquarie. John is passionate about financial sustainability and enjoys helping businesses increase profits and improve cash flow by finding the hidden cash in their businesses.
Businesses and individuals come to John for their tax, tax planning, and business advice for asset protection and risk management.
a/ 6/114 William Street, Port Macquarie, NSW 2444, Australia
t/ 0481 039 851
The advice here is general in nature and readers should seek their own advice for their specific circumstances.
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