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A Profitable Bankrupt Business |
Some of you may be asking if it is possible for a business to be profitable and bankrupt at the same time. Well the simple answer to this question is “Yes it is”. A business can be profitable and be cash-strapped all at the same time. In practice, there are many businesses that precariously operate in this way. Some of them are under the misguided belief that their business is financially healthy just because they are generating strong profits. The connection between profit and cash is hardly made by such businesses until their bank informs them that their cheques can no longer be paid due to lack of cash.
Understanding the rudimentary principles of interpreting and evaluating financial statements accurately can help businesses identify whether their business is profitable and liquid. In reality is cash is king, whereas profit is fantasy. A business with no cash will soon become insolvent regardless of whether it is profitable or not. In this article we will explore strategies businesses can implement to ensure they generate healthy cash and profits at the same time.
The first strategy is to set up a clear policy on credit sales. Such strategy can include approving customers’ credit lines based on their credit ratings. To do this you must have a system in place to determine customers’ credit worthiness before approving credit lines. The next stage is to determine how much credit period to extend to customers. In determining the credit period, it is always advisable to find out what the normal practice in the industry is (e.g. 15 days, 30 days or more) and what credit period you can expect from your suppliers and bankers to cushion you over this period. All too often, small businesses in particular, give very long credit periods to large businesses only to run into cash flow problems owing to its inability to make timely collections from these customers. One way to get around this problem is to stipulate the payment terms clearly on the invoice before issuing it to the customer, as well as to charge interest on outstanding invoices after the approved credit period. But remember, the policy of charging interest on outstanding invoices after the credit period must be clearly communicated before it is enforced. Failure to communicate terms in advance could result in damaging the business’ relationship with its customers. Most successful businesses operate this policy and as a business owner you can do the same.
Other strategies you can use include using factoring agents, insuring against the risks of bad debts, negotiating competitive credit terms with suppliers and giving discounts to customers for prompt payments. For advice and support on this subject, contact sheila@businessservicessupport.com
Sheila Elliott is an expert in business and personal development strategies. She is the founder of Business Services Support Limited and the author of My Business Is My Business- Learn How To Earn A Fortune. For more information about are free articles visit, http://www.businessservicessupport.com and http://www.sheilaelliott.com |
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