Criticial Finance Issues: Financial Times Briefing

CR ITIC AL F INAN CIAL ISS UES

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How do we know whether we’ve succeeded or

failed?

Success in cashflow management is apparent when it thrives (see Table 10.2).

Table 10.2 Recognising success and failure in cashflow management

Success in cashflow management Failure in cashflow management

• Good positive cash balances

• Targets set out in the cash forecast

are achieved

• Satisfactory cash surpluses over the

medium and long term

• Recurrent cash crises

• Constant low-level cash shortage

• Unable to finance expansion

• Difficulty paying suppliers

At the same time, getting through a crisis is success of a kind and should not be

underestimated.

Liquidity

The same considerations apply to success in handling liquidity, where the

absence of problems constitutes success.

The signs of a liquidity crisis are that it threatens to turn into a cashflow crisis;

then the business will have difficulty in paying its debts on time. Is it possible to

differentiate between problems with managing cashflow, on the one hand, and

liquidity, on the other, since their consequences are similar? Success and failure

in liquidity management are shown in Table 10.3.

Table 10.3 Recognising success and failure in liquidity management

Success in liquidity management Failure in liquidity management

• Stable liquidity ratios

• Absence of cashflow constraints

• Clear liquidity reporting and reliable

cashflow forecasting

• Increasing proportion of net worth

tied up in working capital or fixed

assets

• Cash shortage despite plentiful,

unencumbered assets

• Difficulty rolling over existing debt

It is usually clear what led up to a cash shortage if the issue is one of liquidity.

A more profound issue is whether, merely because there have been no conse-

quences, this indicates success and good management. You may simply have been

lucky. It just happens that no event has triggered those consequences that could

have been avoided if liquidity had been better managed. But you may not be lucky

next week… or tomorrow. Conversely, if you suffer a severe cash shortage then