Just as human beings who are put on a life support machine (oxygen) could live temporarily, companies that depend on overdrafts, loans, government bailouts, need a rethink. Have you heard of leverage and leverage? Simply defined as the receipts and payments for a business’s operations, the cash flow statement is intended to assist or provide an ‘invisible hand’ to the day-to-day operations of a business entity, both new and existing businesses. This is especially important for small businesses that cannot raise funds in the short term. A business can generate large profits, yet it may not be liquid; you could be starved for cash. Therefore, profitability does not necessarily mean liquidity.
Profitability is an accounting concept that is measured using either the net profit margin or the gross profit margin. Liquidity is the ability to convert current assets into cash or ‘legal tender’ for a business’s operations with ease. This is significant because current asset financing depends on the level or amount of short-term financing and its sources of financing. They have liquidity problems.
I tell people that they cannot ‘eat’ their property, machines, probably their stocks, or use them to pay their staff, suppliers or creditors. The collateral for a secured loan can be affirmative. But for how long? There is no denying the fact that most top auto companies, such as General Motors, bowed to the recession in its early stages because they did not have the most liquid assets. Its failures could be attributed, among other things, to an excessive dependence of the share price (the demand side) on market capitalization. The reason is obvious that when consumer confidence fell and investor demand for stocks fell, their market caps fell and the rest is what we are all witnessing and feeling now.
Most of the large auto companies that collapsed during the current recession were primarily due to a lack of adequate liquid funds to continue. Although some banks failed, at least some regulations of some sort are known to exist to hold funds for the capital adequacy ratio on “tough days.” MiFID; Basel I and II and the recent “stress test” instituted by the US government are some examples.
In light of this unexpected, shocking and surprising turn for so-called blue-chips, there should be some kind of regulatory mechanisms directly monitored and controlled and maintained by central banks whereby companies hold some cash or reserves (which could easily become cash) being at least 2 years of salaries and expenses of your business and personal operations. Alternatively, banks can run a scheme to guarantee staff salaries and company expenses. The benefits of this scheme would be enormous and would definitely outweigh the costs. Socialism? Not far from that. Still mixed economy, but simply being more cautious so that the excesses of a few do not bring down the entire economy, thus bringing incalculable difficulties to the masses.
Principles are principles, they may not work once, but they work most of the time. The ‘stress test’ recently introduced by the US is reported to have been successful (though it is too early to say) However, governments intending to ‘copy’ the ‘stress test’ from the US should Consider that with regard to your business environment and also wait for the “dust” to settle.
The business cycle is real, but it could be manipulated or managed well in some way. Economists will tell us that a company can enjoy economies of scale for a long time if it knows what can lead to diseconomies of scale; They can be manipulated or managed by the company to maintain the long-term L-shaped average curve (LRAC) and will not get the usual long-term U-shaped LRAC. I am in favor of correction. The survival of a business entity depends not so much on profits as on its ability to pay its debts when they are due and have cash available for its day-to-day operations. Such payments could not only include profit and loss items such as material purchases, salaries, interest and taxes, but also principal payments for new non-current assets and repayments of principal on loans when they are due, for example in the repayment of obligations. .