Jonathan Munnery
Insolvency & Restructuring Expert
A balanced asset-to-cash ratio provides financial security and minimises exposure to financial risk. If a company is asset-rich, yet cash poor, immediate access to money may be limited which could give rise to the risk of insolvency.
While assets hold considerable value and provide a lifeline to companies in financial distress, assets are non-liquid which means they cannot be readily converted into cash. On the other hand, cash is readily available and can be accessed without delay. As such, companies must have unrestrained access to both avenues for essential and sufficient financial fuel.
Jonathan Munnery, a company debt expert at UK Liquidators, looks at what it means to operate a company that is asset-rich, yet cash-poor.
Balancing the asset-to-cash ratio
A company with limited cash will struggle to fulfil its day-to-day financial obligations, such as mortgage/rent, utility bills, staff wages, and loans. This will have a knock-on effect on the overall financial health of the company and put the company at risk of becoming cash flow insolvent. This is when a company runs out of cash and therefore, must halt trading until financial assistance is sought. At this point, selected company assets may be realised to provide a much-needed cash boost.
The company may realise assets to rebalance the scales and replenish cash flow. By maintaining a balanced asset-to-cash ratio, the company will have multiple avenues through which to access cash varying in value, should the need arise.
Operating an asset-rich company
Assets can be separated into two categories - hard and soft. Hard assets are tangible and typically high value, and soft assets are intangible and generally low value. A company will naturally invest in a range of hard and soft assets as part of its operational structure.
Assets are essential to the daily running of a company and are strategically invested in to provide value to the company. They also serve as a safety cushion as they can be realised in the event the company requires more funds.
While assets equate to company wealth, note that the value of hard assets is usually contingent on market conditions. A period of high consumer demand or material scarcity can push the value of company assets to skyrocket, while asset values can nosedive in response to regulatory or tax changes. Due to the nature of hard assets, such as equipment and machinery, their depreciating value must be considered.
By balancing the asset-to-cash ratio, the risk is more diversified as the value of assets will fluctuate over time.
Operating a cash-poor company
Cash is a liquid asset as it is readily available and can be accessed immediately to serve the financial needs of the company. Without sufficient cash, company operations can screech to a standstill and cut short growth. A company has a variety of cash needs and will therefore, ringfence cash to serve different purposes, such as cash flow, working capital, retained profits and reserves.
Company assets can be converted to cash to serve a variety of purposes, from funding the growth of the company, reinvesting in assets, reducing company debts, to restoring cash flow. It’s equally vital to have access to cash, as while company assets are realisable, it takes time, strategic planning, and often professional expertise to secure a fast sale.