16/07/2010 16:04:02

The economic downturn of the early 1990s created lean, recession-proof businesses that traded profitably through some very hard times. However, at that time, few suspected that the biggest threat to their survival would be posed when improved trading conditions arrived. Yet as retail demand lifted, some companies were tempted to over-extend their credit lines at a time when customers where still exceptionally reluctant, or unable, to pay-up. Accordingly, before too long, some of the most dynamic business held a mountain of debt at a time when their asset value was low. At this point, it was in the gift of their friendly bank manager to keep them afloat, but the all too familiar truth was that those 'umbrellas' offered so readily when the sun was shining were snatched back the moment heavy rain fell.

This all comes down to the need for each business to closely manage its cash-flow and be alert to the dangers posed to even well run concerns that take their eye off this particular ball. It would be an especially sour pill to swallow if, after navigating the past 36-months, sound businesses were now to fail. Promises from long standing customers to pay their growing bills soon, whilst comforting, are next to worthless when facing financial collapse. If such promises were currency, then no business would ever go bust. Only cash-in-hand will carry any weight when facing a previously accommodating bank manager who asks the killer question, 'how do you intend to settle your debt with us'?