30 Mar 2012
The only thing we can predict right now is that prevailing business and sales conditions can change overnight, and without a cash buffer you may not be able to survive the downturn to benefit from the upturn.
Cash was once undoubtedly king. Its importance has been downgraded over the past few decades, as a free flow of credit and the growth in assets values during inflationary cycles made many business executives think that cash in the bank was a losing proposition.
Working capital overdrafts to manage and grow your business became the accepted strategy, then the creation of business credit cards provided another easy avenue of funds. Cash became less important, but I’m convinced that our world of shifting imperatives is now forcing executives to re-evaluate the need for cash reserves in their business.
These imperatives include:
• Bank rules that vary at a moment’s notice on whether they will continue with existing arrangements or agree to extend credit (you know - you get an umbrella as long as it doesn’t rain).
• The ostensibly low cost of credit - particularly for $US dollars based on the Fed’s close to zero interest rate, while market rates actually bear no relationship to those of the Fed or our Reserve Bank rates.
• The collapse of the Euro and Europe due to irresponsible Governments spending money that they don’t have (funded by debt) to maintain lifestyles of indolent/early retirement populations.
• The relatively flat movement in asset values including property and the possibility of capital losses.
• The devaluation of purchased stock due to the rapid aging of new technology and/or the rising $A, making stock redundant before it leaves the shelves or cheaper to buy in the next shipment.
• The change in consumer purchasing habits with smart phone apps used to buy direct including GST-free overseas goods - the fastest growing sales channel.
• The drying up of capital for stock market floats.
• The stricter credit rules of suppliers to supply goods and the new PPS regime.
• The extended credit terms demanded by major retailers from their suppliers e.g. from 60 – 90 days so they can extract more to make up shortfalls on their bottom line at the expense of the supplier.
• The more aggressive approach to debt recovery from Government agencies including the ATO (the financial crisis is apparently over).
• Constantly shifting sands between recession and economic growth.
• Wages growth with no upward elasticity on prices due to competitive pressures.
• The effect of the carbon tax.
This plethora of current conditions should make us re-examine our views about building and maintaining a cash fund in our businesses.
We are witnessing numerous closures and insolvencies in retail businesses. I expect the same will occur in distribution/wholesale enterprises, as surviving retailers go direct to pick up any remaining margin that will help them compete against direct internet sales.
Operating a manufacturing business is a lottery in this country, depending on whether the Government of the day thinks you are worth any financial assistance. Australian service businesses are being pressured by overseas competitors as technology and data transfer drive new cost effective models.
So the great challenge (excluding the mining industry, to which China is the key) will be staying in business rather than growing it. A cash buffer will help you survive the downturn, and those that do are likely to pick up market share which should more than make up for the losses on the downturn.
We often laugh when we hear the adage ‘Cash is King’. If you haven’t got it, I suggest you ‘anoint’ it on the throne. For those of you that have it, may it continue to reign long over your business.
Written by David Mond, Managing Director of recoveriescorp