Asset Management and Liquidity

Investing more than a business can afford in current or fixed assets can lead to liquidity crisis, irrespective of credit or asset finance.

Working Capital and Liquidity

A balance sheet forecast showing positive equity signifies solvency. That however does not signify whether or not the business is in a position to meet its liabililties as they fall due for payment.

Paying the bills on time depends on the liquidity of the business and that is broadly described by its net current assets. These are also known as working capital and if they are insufficient to generate cash as and when it is needed, there is a real chance that a business will face the prospect of cash flow insolvency; by far the principal cause of business failures.

For this reason the most important forecasts that Figurewizard produces for its users are those for the balance sheet, monthly cash flows and bank balances.

Managing Investments in Assets

The two golden rules for the management of current assets are that cash collection from accounts receivable is efficient and that the level of stock / inventory is such that its value is being turned over regularly throughout the year. These are measured by the forecasts for cash collection and stock / inventory performance ratios that Figurewizard produces .

Investment in fixed assets should only ever be justified by the strength of their predicted returns on that investment. Those returns must always be judged on their likely short term effect on working capital and cash flow as well as on profitability.

Fixed Assets and Cash

Acquiring fixed assets always come at a cost to working capital regardless of asset financing.

This is because plant and machinery, office equipment or commercial vehicles are regarded as being essential for the purpose of enabling business operations, so cannot be cash convertible. In addition their depreciated value represents their residual working life; not their market values.

Asset finance or credit will go some way to mitigate their costs to cash flow but in the short term at least there will be less cash for other things. Whereas the net book values of fixed assets are always ignored when calculating working capital and short term liquidity, asset financing repayments due within the next twelve months are charged to it.

Investing Beyond the Businesses' Means

With very few exceptions the plain and simple fact is that business failures only ever result from running out of cash.

Losses are the usual suspects but a business carrying assets beyond the capacity of the balance sheet to support them will do the job just the same. These include unnecessarily high values of stock / invetory or slow collection of accounts receivable. They can also arise where investment in fixed assets adds more to current liabilities than liquidity can absorb.

Corporation Tax and Marginal Relief From 2023 Deferred Income Explained What is a Monthly Cash Flow Forecast What is Pretax Profit How does a balance sheet balance? Lockdown Recovery: Forecasting Profits, Cash and Finance. How to Apply for Business Interruption Scheme with Figurewizard How to calculate liquidity and short-term liquidity How to calculate markup and margin The Truth about Monarch Airlines Labour's Spending over 10 years from 2000 How to make profits and not run out of cash Credit Checking - How to Read Micro or Short Form Accounts Amortisation of Arrangement Fees for Long Term Loans BHS Profits Performance 2010 - 2014 BHS profits, liquidity and cash flows 2009 - 2014 How to Calculate a Free Cash Flow Forecast Campari: How to apply for a bank business loan What are Current Liabilities What are Current Assets Late Payers and Cash Flow What is Operating Cash Flow? What is Working Capital How to Read a Balance Sheet Business Planning Cash Flow Calculator Short Term Liquidity Business Liquidity Corporation Tax is not Calculated on Net Profit Small Business Corporation Tax Cash Flow Calculator Using Figurewizard - VAT Using Figurewizard - Sales by Month Using Figurewizard - HP or Instalment Plan Budgets Using Figurewizard - How the budgeted cash flow forecast is calculated Using Figurewizard - Fixed Asset Budgets Using Figurewizard - Calculate Purchase of Goods Using Figurewizard - Forecasting Payments to Suppliers Using Figurewizard - How to Forecast Cash Collection Solvency and the Balance Sheet Property in the Balance Sheet Why Equity is a Liability Asset Management and Liquidity Selling Fixed Assets Contracts: Invitation to Treat What is Deferred Income Loss on the Sale of Fixed Assets Calculating Gross Profit Margin Profit and Loss Statement What is Operating Profit What is Net Operating Revenue What is Equity Profit on the Sale of Fixed Assets How Taxable Profit is Calculated What are Operating Overheads Overheads - Provisions How Depreciation is Calculated What is Business Operating Activity What are Fixed Assets Liquidity and Cash Flow Balance Sheet Liabilities and Leases Stock or Inventory Control What is Distressed Stock or Inventory What is Interest Suspense Account Product Safety Laws What is a Bill of Exchange What is Payment at Sight What is a Pro Forma Invoice What is a Bill of Lading What is a packing note What is Demurrage Cash Flow Forecasts and Planning Factoring: Invoice Discounting and Cash Flow How Does VAT Work Figurewizard as a Sales Aid for Factoring and Invoice Discounting