A great idea is worthless without the funds to bring it to fruition. One of the most underappreciated responsibilities of business leaders is to ensure adequate liquidity for each new endeavour that their companies embark upon. This task requires great insight into company operations and market patterns, as well as an excellent sense of timing, as the necessary cash must be available at the precise moment the organisation needs to access it. Whether a business is a well-established company or a fast-growing start-up, this principle holds true. Even the most seasoned organisations can falter if liquidity management is neglected, just as newer companies can fail to get off the ground without the right financial planning.
Fundraising is an essential element of this enterprise. Executives need professional, well-prepared presentations to attract interested parties, and the terms for such investment must be carefully thought through.
Cash flow is also an internal matter, however. Company accountants should routinely prepare a six-month cash flow forecast, to be delivered to the Board, for planning purposes. The Board, for its part, should use this information to identify non-essential spending and make appropriate cuts when needed.
Elsewhere, processes should be optimised to streamline operations and maximise resource utilisation, outstanding customer payments should be followed up on rigorously, routinely late-paying and low margin customers should be re-evaluated, sales and inventory numbers should be regularly scrutinised, and technology such as RPA and real-time inventory management software should be incorporated to improve accuracy and avoid internal waste.
The combination of these and other efforts will help to free up cash, which can then be used to pursue new opportunities as they appear, and begin new projects that will pay higher dividends down the road. A company without those freedoms can invest properly in neither its present nor its future, and therefore has fewer moves to make. Such a company will soon find itself at the mercy of outside circumstances, whose inherent challenges will sooner or later prove insurmountable.
Pertinent Examples
This lack of liquidity doomed Nakornthon Bank in Thailand during the Asian financial crisis of the late 1990s. Unable to access sufficient capital or manage cash flow, the bank underwent collapse until it was acquired by Standard Chartered Bank.
Another company that failed to make proper allowances for liquidity, timing, or circumstances was the American workspace organisation WeWork. Though initially expanding rapidly across multiple global markets, including Thailand, the company over-expanded, burning through cash even as it failed to secure a satisfactory level of outside investment. In the end, it simply could not pay its debts, and the company crashed as quickly as it had been growing. At its peak, WeWork’s valuation had soared to $47 billion, only to plummet to less than $50 million as the company failed to adequately prepare for liquidity challenges. While some regional operations may still show signs of stability, the overall liquidity crisis was enough to undermine the company’s global standing.
Without Money, Nothing happens
If you want to be considered the preferred customer by your suppliers, and be prioritised accordingly, you’ll need to make sure your payments are on time or early. If you want to survive a dry sales period, or chase after an unexpected opportunity, you’ll need cash on hand to do it.
Grant Thornton routinely advises businesses on questions of liquidity. We can help your team operate more efficiently, while also showing your executives how to impress would-be investors. Our advisory services can also provide the cash flow analyses that will help you plan with confidence, months in advance.
Failing to keep cash on hand is like driving in the dark without headlights, or walking a tightrope without a net. Your business will be in a far better position with the extra degrees of freedom that liquidity affords, as well as its ability to turn an unexpected obstacle into a potential opportunity to reach out for.
Note
This article is part of an ongoing series entitled 6 Ways Your Business Can Fail: A Guide to Recognising and Avoiding and Avoiding Critical Threats to Your Company's Success
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