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Owe no!
Page 42
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Debt, like fat, is necessary, but fatal in too high a quantity. So how do you
know if your debt is putting the life of your firm at risk? Louise Cole repot-Ls.
For most road transport companies, debt is a way of life. You mortgage premises, lease trucks and buy fuel on credit. You may also rely on additional loans for investment or expansion.
There are two crucial elements to taking on and supporting debt. The first is cash flow, which is how you will service the debt; the second is the solvency ratios, which guide you as to how much you can afford to borrow.
les all about cash flow
Cash flow is your lifeblood— you can run at a loss for an age, but you only run out of cash once. It can be defined as the ability to pay all your debts, or the ability to pay wages at the end of the week — either yours or others'. To ensure a healthy cash flow, you need to focus on getting money in fast and paying it out as slowly as your credit agreements allow. Having a wide portfolio of clients (and not depending on any one of them for more than 10% of your revenue), credit-checking clients, putting stops on accounts the moment you see hesitation with a bill, and factoring can all be useful ways of ensuring that all the money you need flows in rapidly.
In particular factoring —where a factoring company purchases your accounts-receivable invoices from you at a discount and then collects the invoiced amounts from your customers—can shorten your trading cycle and give you more cash with which to expand.You lose a percentage of the money that is owed to you, but the flexibility this system gives you could be well worth it.
A business advisor at government business support service Business Link says:"Factoring can increase the amount of turnover you can support on the asset base of the business."
Solvency ratios
As well as giving you an indication of how much you can afford to borrow, solvency ratios (see panel) are used by banks to work out your creditworthiness.
It is worth checking them regularly — a poor score on any one of them can highlight a problem in time to fix it. SMEs (small to medium enterprises) must be absolutely confident of their financial facts at any time, • • is • • OOOOOOOOOO • • • • • • • • *************** even in the absence of a financial director.
• Don't rely exclusively on your accountant.
• It is particularly important for smaller hauliers and owner-drivers to keep assessing these ratios because their vehicle asset base can erode quickly.
Larger companies do not always have a strict formula for borrowing; however, every one of them will work their cash flow very hard to ensure that however much they owe on paper, they can service debt on the nail.
It is worth remembering that the Plimsoll report earlier this year,which identified winners and losers within the industry, found that size and sector are irrelevant to whether a firm is likely to fail. Successful firms are those that keep a minute-by-minute cost analysis and take remedial action as soon as a possible problem is detected. it