Page 15 - How To Avoid Going Bust In Business

If your current debts are greater than your short term cash assets there’s a problem
but at this stage it is no more than a yellow flag. A warning sign.

In theory, of course, you should have enough cash in the bank to pay all the bills.
You’d probably also have the pigs fed, watered and ready to fly. This book is not
for people in that place of financial serendipity.

The next month you do the same thing. If the difference is less – in other words you
have managed to reduce the shortfall – great. But you aren’t home and dry yet.

On the other hand if the shortfall is greater than the previous month then now it is a
red flag - it’s time to start taking action. Don’t delay. You are already sailing into
financial shoal waters and could go on the rocks at any moment.

A bit later I’ll tell you what to do at this time.

In the third month if the gap is wider still it’s crisis time. This is a black flag. At this
point you must take drastic action before your business goes into a terminal tail-spin.
You dare not delay any longer. This is the time when hoping against hope gives way
to grim reality.

And that’s it. That’s the secret. Constantly measure cash assets against cash
liabilities. It’s not hard.

Bob Stannard told me that in most of the small to medium businesses that go bust
the owners don’t even know how bad things are until he, or someone like him, is
asking for the keys to the premises.

What debts must be included?

I said above that you must add up all the money you owe to creditors but you also
need to do a tally of any loans to banks or finance companies.

If you don’t include bank loans, overdrafts or short term finance company loans you
can get a false picture of the way things are moving.

Here’s an example:

Month one:

Money Owed To

Alpha Supplies $2000

Bravo Corporation $3000

Charlie Brown $1000