by John Whonderr-Arthur Esq Phd

Created on: June 11, 2009   Last Updated: June 15, 2009

How Liquid is Your Business?

If your business is short of cash and no cash is flowing into that business, you should immediately consult a 'cash doctor'. Your business needs a check up. I am not joking.

Cash flow is like the air we breathe to a business, starve them of cash and the business dies.

Just as human beings who are put on life support machine (oxygen) could live temporary, businesses that rely on overdraft, loans, government bailouts, need a rethink. Have you heard about gearing and leverage?

Simply defined as the receipts and payments of the operations of a business, cashflow statement is meant to assist or provide an 'invisible hand' to the daily operations of a business entity existing and new businesses alike. This is of special importance to small businesses that are unable to raise funds at short notice.

A business can make huge profit and yet might not be liquid; it might be starved of cash. Thus, profitability does not necessarily mean liquidity.

Profitability is an accounting concept measured by using either net profit margin or gross profit margin. Liquidity is the ability of turning current assets into cash or 'legal tender' for the operations of a business concern with ease.It is measured by using either current ratio or quick assets ratio. This is significant in that current assets financing are dependent on the level or amount of short-term finance and their sources of funding.These must also be planned in relation with the cash flow generation of the firm concerned.A firm can be profitable and yet have liquidity problems.

I tell people that you can neither 'eat' your properties, machines, probably your stock nor use them to pay your staff, suppliers or creditors. Collateral for a secured loan may be yes. But for how long?

It is no gainsaying the fact that most of the blue chip automobile companies like GE bowed to the recession in their early stages because they were short of the most liquid asset.

Their failings could among others be attributed to too much reliance on the share price (the demand side) of the market capitalisation. The reason is obvious that when the consumer confidence fell and the demand of shares by investors went down, their market capitalisations dropped and the rest is what we all witnessing and feeling now.

Most of the big automobile companies which crashed under the current recession were mainly as a result of failings in having adequate liquid funds to carry on. Though some banks failed,

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