Thursday, March 19, 2009
Have you ever wondered why do companies always seem to declare liquidity problems only when it's too late?
Why does it seem that when a company declare cashflow problems, it's almost destined to be liquidated?
I will try to give you an alternative view in this area if you are still wondering why the above scenarios seem to happen all the time.
Let's say you are the CEO of a company and sales have reduced significantly but working capital continue to remain the same. This will affect net profit for the year and you might be forced to make the decision to dip into your accumulated reserves, your profits accumulated over the years since incorporation.
This is the first sign of a serious cashflow problem but you might be hoping that this is just a bad patch.
In order to have more cashflow, you decide to borrow some money from the bank so that whenever opportunities arise, the borrowed money can be used to invest in the proposed projects.
If sales do not increase and the margins continue to be squeezed and faced with interest payments, you might have to make the decision to declare that your business is no longer of a going concern.
Think of it this way now.
Your company now owe money to your creditors. Upon knowing that the money owed to them, which of the creditors would not want their money back first.
Once liquidity problem is made public, it'll only hasten the speed of your liquidation, instead of help it.
This is one of the main reasons why companies "SEEM" to collapse OVERNIGHT.
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Everybody at a company is afriad for their job nobody wants to face the truth thats just the way it is the really horrible news about a company will dribble out slowly but surely. This is the worst thing that can happen if you own shares in the stock its one terrible thing after another thing. Peter Lynch sums it up best for many companies its always darker before its pitch black.
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