Recently, at one of their excellent lunches, the UK 200 Group washe fact that hard cash is one of the main components for business survival, says Sir Peter Kemp. addressed by Ms Barbara Roche, minister for small businesses at the DTI.
She gave a good talk, pretty predictable in some ways, but nevertheless useful in terms of emphasising the importance of small firms and small firms’ accountants.
But there was one thing she said that is particularly worth noting. Under the heading of ‘financial management and coming first’ she said, ‘ultimately the product of good financial management is sufficiency of cash to pay creditors and invest in the business’. It was only after that she went on to questions of improved profitability and so on.
It is interesting to question whether this emphasis was accidental or deliberate. I think we would have to ask the, presumably junior, official who drafted her speech. But in the event, Ms Roche put her finger on a priority which everyone should be thinking about rather carefully. Namely, the adequacy of cash and whether we are becoming too obsessed with the niceties of academic-type accounting standards.
It is amazing how little attention seems to be paid to cash. Perhaps it is because we have had a number of years now when there has been plenty of it about. But many of us can remember the 1970s, when we had excellent firms such as Ferranti and Rolls Royce, which, by the accounting standards of their days, were making good money, but who got into deep, deep trouble simply because they ran out of money. Some were picked up by the government, some by the Bank of England’s ‘lifeboat’, but some, alas, went under. The problem of sheer lack of money.
Now we haven’t seen so much of that in recent years. But we could see it now. The problems in the Far East, in Russia, perhaps in Brazil, and so on throughout the world, are going to make bank managers more beady and cash in hand more valuable.
The balance sheet and the profit and loss account are all very well, but where are the green-backs? You can’t pay wages or taxes or creditors any other way. People out there should start to ask themselves not just whether they are recording any profit, but what is happening to the money?
One is reminded of what they said of the man knocked down on a zebra crossing; he was dead right, but just as dead as if he had been dead wrong.
Elegant accounting is all very well, but it is an expensive waste of time if in the process you run out of cash.
Sir Peter Kemp is chief executive of the Foundation for Accountancy and Financial Management.
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