Cash is King

Postat la 02 iunie 2009 18 afişări

The American saying is more valid today than ever. Those who have cash for daily operations, for potential acquisitions of competitors or simply money saved for the rainy days are in a fortunate position.

The trouble is that all companies are trying to put off their own payments as much as possible and collect money from clients even in advance, if possible, although this is now very seldom achievable, due to the financial blockage. But can companies avoid this blockage although their sector is affected or will one player defaulting on its payments cause a chain reaction?

Marius Ghenea, an entrepreneur who prefers to invest in start-ups, and has eight companies in his portfolio, says a company with losses and a positive cash flow is more solid than one which makes a profit, but which has its cash blocked, and is unable to pay its employees and its debts (most Romanian companies finance their operations via loans). In order to maximise cash inflows and minimise outflows, Ghenea believes the firm needs to increase sales and cut costs.

Although it sounds simple, it isn’t. Sales should not be boosted at all cost: if the markup is cut too much, companies and entire sectors can be hurt. Cost cuts are also problematic, because such measures can generate significant subsequent costs; for instance, layoffs can give rise to immediate compensatory costs - i.e. unwanted expenses. Ioana Constantinescu, general manager of Chimtotal, in turn believes there are strategies to avoid a liquidity shortage. It is essential to keep a firm eye on the cash flow, especially the forecast one.

”We should be able to keep a strict record both of payments made to us and by us.” The company, a distributor of raw material for the cosmetics and the furniture industries, ended last year with 700,000 euros in turnover. Now, payments tend to be about two weeks late, and Constantinescu is getting increasingly more requests for a rescheduling of payment, especially when large sums are involved, but, at least for some products, the company is not willing to accept late payment. The explanation for this is that, although for the time being the balance between sums coming in and those going out is reasonable, both in terms of value and in terms of deadlines, there is always the risk, including for a profitable company, to default on its payments. One thing is certain right now: not all companies have a strategy that can shield them from problems, so the advantage of those that have a ”map” to avoid a liquidity shortage is all the more important.

Traducere de Loredana Fratila-Cristescu si Daniela Stoican

Urmărește Business Magazin

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