Page 155 - (DK) The Business Book

MAKING MONEY WORK 15 3
153
See also: How fast to grow 44–45 ■ Investment and dividends 126–27 ■ Making money from money 128–29 ■ Leverage
and excess risk 150–51 ■ Maximize return on equity 155 ■ Balancing long- versus short-termism 190–91

company may rely on dipping into A business receives a $24,000 order, and has to plough cash into
an overdraft to make up for a cash making the goods. By week six, $20,000 has been spent by the company;
shortfall. But when times are tough, the customer is invoiced, but is not required to pay until week 13. This
means the company faces serious negative cash flow for 12 to 13 weeks.
a reliance on the bank may be too
risky. A business needs to manage 10
its finances well enough to avoid
periods of negative cash flow. 5

How good companies fail 0 Profit
Cash is a constant pressure for $4,000
every new business. Even if the -5
company keeps to its start-up $0000s -10 Deliver and
budget, it takes time for trading invoice
to reach a high enough level to
-15
generate positive cash flows. For
example, a sports’ equipment -20
store may take three years to
build up the regular clientele that -25
1 2 3 4 5 6 7 8 9 10 11 12 13 14
will enable it to start making
WEEKS
money. Until then, the business
faces negative cash flow. So it
is crucial for new businesses to flow problems can also cause well- admitted that its overall financial
prioritize cash flow from the established companies to stumble stability had been seriously
beginning. This may mean and even collapse. In 1998, South undermined by a new reliance
leasing equipment, or buying it Korea’s Daewoo Group encountered on borrowings, but insisted that
secondhand rather than new, and growing problems because of it was a brief moment of crisis.
choosing suppliers that provide “increasing difficulties in arranging Despite being one of the largest
the same credit period as the store working capital and investment conglomerates in the world, the
gives to its customers, even if these funds.” The group had been group collapsed the following year
suppliers cost a little more. Cash- aggressively expanding, and due to massive cash shortfalls. ■

Money scams

US investment advisor and of these early customers led
financier Bernard Madoff was them to recommend the scheme,
sentenced to 150 years in prison which then continued to pay
in 2009 following a money earlier investors with the cash
scam that is believed to have put into the company by
led to about $18 billion of losses subsequent investors.
to investors. Although hailed This type of financial pyramid
as a distinguished and expert is able to stay afloat as long
financier, capable of generating as sufficient numbers of new
very high returns for investors, savers put cash into the scheme.
Madoff was in fact responsible If the flow of funds dries up,
for running a “Ponzi scheme,” in the scheme collapses. Madoff’s Farmers buying livestock at market
which cash from new investors scam collapsed due to a loss of must—like many business owners—
is used to pay generous returns investor confidence following pay up front. Costs, such as feed and
to earlier investors. The delight the 2008 financial crisis. storage, will mount before they see a
return on their investment.