February News – 2015

February 10, 2015 ,

DIAGNO – FEBRUARY NEWS

First month of 2015 is finished already, can you believe it!

Australia are the Asia Pacific football champions; and we find ourselves with a potentially hung parliament in Queensland. I have to say I feel for the Queensland Premier. I use the term “Queensland Premier”, because from a financial perspective it would not have mattered who was in power before the State Election last Saturday.

Like many business owners who are faced with the challenge of carrying too much debt in their business; economically the Queensland Premier is caught between a rock and a hard place.

Below are two very simplistic Balance Sheets and Profit & Loss statements. One is labelled “Good Times”, the other “Challenging Times”, with thought provoking dates applied to both.

Screen Shot 2015-10-28 at 3.50.26 pm

Governments and business are confronted with this dilemma right now.

From a business perspective, in the good times, the business felt solid and strong. A good corporate citizen, trading well, employing, making a profit, and paying tax.

But now, a decade later, a similar size business in “Challenging Times” same Balance Sheet, reduced interest rate on liabilities, turnover is down, and expenses are the same.

The business now finds itself in a negative cash position. Unfortunately, many business owners borrow money to fund the shortfall, instead of reviewing key elements of the business to return to a positive cash outcome.

Long term negative cash flow cannot be continually funded by borrowings, it compounds the problem.

This is one of the challenges faced by all levels of government today, no matter your political preference – Labor, Liberal or Independent.

For Governments globally to maintain services with declining income, and increasing expenses (unemployment and increased debt to service), they have to reduce services or increase taxes to be sustainable.

We have not touched on the possibility that the value of the Assets could drop in value, resulting in an increase in the Loan to Value ratio (LVR) that causes the bank to ask you to make a significant principal repayment on the loan – all when your business cash flow is negative!

As a business owner it is unsustainable to continually borrow money while waiting for conditions to change. Look at your business … how are you tracking?

The team at DIAGNO encourages you to make sure your business model is sustainable, for both a rising and/or falling business environment.

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