Could You Make $ 6 Billion & However Be Bankrupt?

If you&#39re a smaller-mid dimensions business owner and having difficulties to make your operation each financially rewarding and cash flow positive, do not defeat on your own up way too considerably! Even some of the premier corporations in this region are finding it wrong and stuffing up just about every working day. Acquire the CBA for instance – just one of the major banking institutions in Australia not too long ago declared a $ 6 billion profit for 2009-10. To put this in context, this equates to close to a 17 for each cent return on traders&#39 funds, which is extraordinary indeed in these rough economic moments.

Way too lousy the CBA is technically bankrupt – this means they do not have adequate liquid assets to go over the debt as it is coming owing.

But how can this be, you could possibly ask? The answer is simpler than you may possibly imagine and it applies to ALL companies (huge and smaller) – Profit is pointless and cash flow is KING! Extra corporations in Australia go beneath just about every year thanks to absence of cash flow than any other solitary purpose. No business, even financial institutions which are afforded quite a few governmental protections and safeguards, are exempt from this simple legislation of the economic jungle.

So how [exactly] can a company that has been equipped to earn $ 6 billion in net profit by overcharging prospects by means of bank fees and desire margins, be bankrupt? The remedy lies in a mystical statement, frequently referred to as the Balance Sheet.

On the still left hand facet of the Balance Sheet we have assets – anything of value owned by the company. In the situation of a bank, financial loans / mortgages are its main assets, and in the circumstance of the CBA, 65% of its financial loans are domestic mortgages. And all people is aware of that domestic home loans are prolonged term preparations – 25+ several years in length.

As for the liabilities side of the Balance Sheet, 50% of the revenue lent out as mortgages will come from depositors (you and I) and the other 50% comes from abroad borrowings. In the scenario of the CBA, fifty percent of the income loaned out as mortgages have to be repaid to international creditors. Regretably, a great the greater part of people overseas borrowings are brief-term (90 day) loans. International exposure on these small term services is a huge vulnerability for all Australian banking institutions and was the main explanation that Kevin Rudd released the bank warranty on particular deposits in Oct 2008. The assurance was not to guard you and I, but somewhat, the precarious Achilles&#39 heel on the Balance Sheets of our banking companies.

If you solid your brain back to Oct 2008, you will don’t forget the worry that ensued when foreign creditors refused to roll above their financial loans to Australia&#39s banks. The banks of system lobbied the government to intervene with the assure and every person breathed a sigh of reduction. But, it&#39s not about. Not by a prolonged shot. Our main banking institutions continue being greatly reliant on abroad borrowings to fund domestic lending and they are precariously susceptible to shocks in worldwide credit score marketplaces. You do not require to be an economic genius to know that the US and numerous other marketplaces still have not recovered from the last crisis. And if you follow the predictions of some of the major economic advisors in the planet, such as Harry Dent and Graham Dyer, you now suspect that the worst might nevertheless be but to come.

Beneath these perilous conditions, you would be expecting that CBA management would have invested / lent all small term overseas money in protected and steady investments. On the other hand, we all know now that 65% of the dollars went straight into domestic home, which is extremely inflated in this region. In excess of the prolonged term, the statutory necessarily mean housing values ​​should common out to a various of 3.5 household income. Effectively, at 3.5 occasions home revenue, a residence is mentioned to be moderately economical. In simple English, this usually means that we should really count on about fifty percent of the populace of a given nation to be living in reasonably priced housing. At present, Australia is the only place in the planet exactly where 88% of the population is dwelling in seriously unaffordable housing – indicating, housing expenditures are much more than 6 moments domestic revenue. It is not tough even for a layperson to see that this inflatable property situation is unsustainable and will occur down.

It is remarkably likely that 65% of the CBA&#39s asset portfolio is overstated on the Balance Sheet by up to 50%. If home values ​​were to appear down in this state, as they have done in Japan, the US and the United kingdom, this would leave an up to $ 200 billion hole in CBA&#39s Balance Sheet and it would be sufficient to result in the collapse of the bank. The CBA simply just will not be able to recoup the sector value of its lending from the sale of the fundamental assets and owners will be left to make up the difference on foreclosures.

And are you ready for the best section? When compared to the financial statements of the other major Australian banks, the CBA is not in poor condition. In simple fact, the NAB and Westpac may well be in even worse positions due to the quantity of overseas exposure and a further, much more sinister evil – off balance sheet exposure to derivatives.

So what does this necessarily mean for YOU and your business?

What you have performed up until finally now implies very little as opposed to what you are going to do, right now. Currently is the very best time to learn how to study your financial statements and turn the numbers into insights that can assist to strengthen your business – both your profitability and cash flow. If your business have been developing a balanced return, you would have the revenue that you will need to pay back down your debt – home loans and credit rating cards – and you would not risk getting rid of your property and other assets in the event of one more downturn. Even if property values ​​were to drop, you would very own your home outright and not be at the mercy of the financial institutions scrambling to foreclose on homes to shore up their Balance Sheets.

The financials notify the tale of your business. Figures do not lie. They are a person of the few goal indicators of how your business is performing and WHY. The figures inform the truth and can guide you to the answer. You just need to study HOW to use them to your advantage – you have to have a little bit of Financial Foreplay!