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n Do we have enough resources to exploit market opportunities?

– Are the opportunities worthwhile?

– What will be the effect on our cash flow if we pursue this
opportunity?

– Are our major needs for investment or working capital?
(Another rough rule of thumb is that long-term loans are
needed for long-term capital needs and short-term money is
required for working capital. This rule of thumb is often
ignored when investment capital is sought – not invariably with
satisfactory results.)

– Will the revenue and profit flows from exploiting opportunities
be sustainable over the life of any loan or investment?

n Can we reasonably expect relatively speedy growth if we borrow or
seek investment?

n Are we prepared to water down our equity in order to build funds?

n Is our gearing reasonably in balance? (Gearing is the relationship
that exists between the owner’s equity in the business and loan
capital. In the old days when accountants and finance directors
based Return on Investment calculations on owned investment
alone, many firms opted to increase loan capital as much as
possible. If they could service the loans through additional profits,
that alone was seen as being enough to justify borrowings. Today
the realization has finally dawned that if you have too high a
gearing, you no longer own your own business. Even mighty firms
like British Telecom now struggles to bring down excessive debts
that at one time would have been seen as indicating fiscal
strength.)

n Can we afford the burden of interest?

n Can we afford it up to the point where cash flow is positive?

n Should we take professional advice before we commit to long-term
debt? (The answer is yes, we should.)

Working capital

A major reason that a business needs money is that it turns that money
into goods or services that it sells for more money. In short we all need
working capital. The key thought here is that money has to work. “Money
in the bank” is a misleading expression. It sounds wonderful, but money
that is sitting in a bank account and doing nothing is only making more
money for the bank. Every firm, large or small, needs to have a treasury
function even if it does not have a treasury department. The treasury func-
tion ensures that the money that you earn earns you more money.

132 Key management questions