Well the squeeze is on from financial institutions on hospitality venues to improve their cash flow and reduce debt obligations. It is now time for your business to do a liquidity health-check.
A cash shortage is usually the first obvious sign to a business that something is not right. However, it is often the last thing business operators project. Do you know what your desired cash levels or minimum positive working cash needs are?
Here are the key performance indicators you can check:
1. Your level of total debt is the first area we should look at. Called the ‘gearing’ of your business, the greater the ratio of debt to equity the more highly geared you are, making you more exposed to interest rate increases in the future and lowering your chances of borrowing more money.
The ratio is: Total External Debt
Total Equity
These figures are off your Balance Sheet as provided by your accountant or your own accounting system. Now we need to exclude any intercompany director loans and concentrate on external debt (i.e. creditors, the bank and provisions).
2. At a ratio of one to one, for every dollar owners have tied up in the business (that is equity or sometimes referred to as shareholders funds), they owe $1 to outside creditors (either long or short-term loans, trade creditors and other liabilities).
The higher the ratio, the greater the risk is to shareholders if interest rates rise. If your ratio is too high, you may need to collect your debts quicker and turnover the inventory faster. Banks become nervous if the ratio starts climbing over 1 to 1 in uncertain retail times.
