Credibility

CREDIBILITY

If you do not manage the cash flows, you are bound to err on honouring credits. If you have not honoured credit over six months, a year or more, it is time you relook if you are worth running a business.

If you believe that your creditors reflect trust when you stretch their credits, know well that they would dump you unhesitatingly when they can.

I recall an attitude reflected by a very large conglomerate. They believed in negotiating real hard as they believed just their name in the customer list of a business would expand the scope of the vendor. You may call it an attitude or find it exploitative crass.

Misusing credits tell about a business that is deprived of cash in hand. There is no limit to engaging the payables as capital for investing more in one's business or expanding its scope. There is also no limit to riding on cash owned by your vendors. Equally, there is no limit to stretch the fallacy of trust.

If the practice is common in an industry, it may just be justifiable to doubt the true strength of the industry and its competence. The stakeholders may not read beyond the revenues and profits. The owner themselves may overlook how definitely their business is playing havoc with their cash and their credibility.

Some companies stretch credits on an average of 3 to 6 to 12 months and beyond. Its telling effect is truly seen when the industry takes an adverse swing, or the economic mood is uncertain. It transforms into a snowball effect on the entire industry or even the economy.

Maintaining the just right cash reserves is an art that the accounting professionals ought to know. It may help during adverse business. It may enhance credibility. It may make a business feel proud of its worthiness.