All business owners know that cash is the lifeblood of any business. They know it so well that in most cases they take it for granted. Let me explain.
Having turned around and changed the financial destiny of more than 150 SMEs in Singapore, I realised most business owners when faced with a shortage of cash crisis would immediately think of getting a bank loan or any credit facility to tide them over. While this may buy them some time, but this is not the cure. The problem would still surface a few months down the road after the loan or credit facility has dried up. Then the cycle repeats.
This is a very prevalent fact in the SMEs universe. Borrowing from Peter to pay Paul as the saying goes. It is a death cycle for most SMEs and if they did not get out of this death cycle fast enough bankruptcy ensues.
However we cannot blame the management team entirely. Their accountants shall share part of the blame as well in our opinion. This is because most corporate accountants are not advising the management team clear enough for them to make any worthwhile decision to affect the future of the company. Most SMEs owners are usually kept in the dark about the financial status of the company until it is too late.
Take for example all accountants know there are 3 financial statements in any financial reporting, namely, the Balance Sheet, the Profit and Loss Statement, and the Cash Flow Statement. They would also know that the Cash Flow Statement comprises of 3 parts, namely, cash flow resulting from Operating Activities, Investing Activities, and Financing Activities. In the case of Cash Flow reporting to the management, all accountants are trained to interpret the Cash Flow Statement with the 3 parts combined into 1. This is where discrepancies on the actual cash flow situation of the company occur.
In our practice, we look into the cash flow from Operating Activities like a hawk. We focus our energies on this part of the Cash Flow Statement to determine the survivability of our clients’ business. If our analysis discovered a negative cash flow situation for more than 3 quarters, then the company is probably doomed for failure and bankruptcy.
Our reasoning is that if a business is not able to generate enough money from its operating activities to make a profit, then having more debts will not help them but worsen their financial situation even further. They need to focus on how, what, and when the company makes money. Also forget about cash flow from Investing Activities. No money.
I hope readers of this article would relook into how their accountants report and interpret their financial statements and as a business owner, we should be more educated financially and start asking accountants questions that concerns the future of the company. Never be kept in the dark anymore.