Why do seemingly highly successful small and mid-market business leaders, who lead a prosperous lifestyle (homes, well educated kids, exotic holidays), routinely run into cash liquidity squeezes in their founding or principle business, particularly later in their careers? Sometimes more than once.
My observation is 95% of these individuals (I count those in a healthy frame of mind):
- Think they are in a stronger cashflow position than they actually are.
- Have run out of people to turn to.
- Have become increasingly insular and lonely.
- Are overly dependent on their waning client book, historic investors or banking friends.
- Are surrounded by loyal advisers, who are blind to the impending danger or are fearful of intervening.
Flicking a switch and generating additional cash fast is not easy in relationship-driven or transactional businesses. Encumbered with these problems, the default option for many is replenishing the pool of cash with asset sales. Yet anyone wise to the situation will spot the pressing urgency and offer “cut throat” terms. In addition, the market for and the “days to cash” for certain assets (real estate) deemed “liquid”, may well be anything but. Stress grows like a boiling kettle.
There are preventative tactics, for example, a monthly or bi-monthly assessment of their short-term business and personal liquidity position, multiple capital providers and an inquisitive mind, consistently, focused on time as a key variable in realising new and existing sources of income, in a short-term time period, to meet BOTH routine and exceptional cash needs.
There are contingent tactics, for example, deferment of non-essential capital expenditure, collateralised loans, bridging finance, revised repayment schedules and the aforementioned, asset sales and so on.
Prevention is far better than after-the-event tactics. Volatility and disruption are not passing storms, liquidity needs to be managed well, at all times.
