Maltastar
Having analysed last week the causes of the serious cash flow problems afflicting the business sector I keep my promise this week to analyse and suggest some solutions.
`Before a problem can be solved firstly steps must be taken to contain it and stop it from getting worse`
Difficult problems resulting from accumulation over long years of misplaced economic priorities have no easy quick fix lasting solutions. Ultimately the cash flow problem can only be solved through regeneration of economic growth which would restore profitability and confidence to make the cash flow business cycle turn again with` momentum.
Clearly this is easier said then done.` But let me outline three important points which are necessary to restore business confidence even if this can only be done over a long period of time.
Controlling over-capacity from the supply side
Before a problem can be solved firstly steps must be taken to contain it and stop it from getting worse.` It is therefore important that new investment, especially that targeted for production of goods and service to be consumed by the domestic market, should not be encouraged if it only serves to increase the over-supply.
I am therefore quite in agreement with the credit policy recently adopted by the` main banks not to finance new projects unless there is a strong cash contribution to the investment cost by the promoters. Perhaps this policy ought to be applied less rigidly where the project is earmarked for export market or for the tourism sector ( which is an indirect export).
Helping existing project who are suffering from cyclical problems
`Banks should stop trying to get blood out of a stone by making impossible repayment and security conditions`
This is where banks are failing. Rigid policies regarding new projects does not mean that the same rigidity should be applied to existing projects where the investment has already been made and the project is finding cash flow difficulties to service its commitments with the banks.
Banks here have to be very judicious in estimating whether the difficulties are cyclical or structural. In case of structural difficulties where the problems result from not carefully thought out` projects or incompetent management, banks have no business to prolong existence through continued avoidance of economic reality.` Banks cannot be expected to risk their own capital and their depositors funds in projects that do not present a reasonable expectation for economic viability in the medium term,` even when the macro-economic situation returns to normality.
On the other hand,` for projects that are undergoing cyclical cash flow problems,` banks have to be more than lenient as these project need to be around to push the economy forward when normality re-establishes itself.
Banks should stop trying to get blood out of a stone by making impossible repayment and security conditions and by increasing the interest burden at a time when businesses need help not obstacles to quicken the bounce from the bottom of the cycle.
The banks` insensitivity in such cases is prolonging the economic downturn and making recovery that much harder,` as new investors are scared off and existing investors are disheartened right when they need to be encouraged and supported.
Credit regulations
`The last suggestion I make to ease the cash flow problem is the promulgation of credit regulations`
The last suggestion I make to ease the cash flow problem is the promulgation of credit regulations.` These are now being adopted by many countries, including the EU and such regulations are particularly helpful to small businesses that cannot compete with the big business that offers extended credit terms.
Such regulations would provide that for regular business transactions regarding ordinary recurrent supplies ( as against investment` supplies for capital expenditure where one can understand that extended credit terms have to be offered) the credit period would by law have to be stipulated at a short number of days ( normally 45 days) and that it would be a sue-able offence for anyone not to pay a recurrent due within 45 days from the underlying date of` supply.
Credit regulations would also provide for payment record` information to be more accessible to the public under controlled circumstances, to ensure that the grantors of credit can base their` judgment on an informed basis regarding the payment record of the prospective client.
Above all
`Clearly this cannot be done by the present fatigued administration`
But above all the cash flow problem can only be resolved if the above three suggestions are framed within a much larger economic recovery plan which is championed by the government and commands the support of employers and unions in due acknowledgement that failure to engineer a recovery would be damning for all.
Clearly this cannot be done by the present fatigued administration and if they truly believe in the protection of our children from the economic collapse which they are so expertly creating, then they should admit that they lost creativity and zest, and make space for a new administration that is rearing to go.
As for the EU project, it, like heaven, can wait.
Having analysed last week the causes of the serious cash flow problems afflicting the business sector I keep my promise this week to analyse and suggest some solutions.
`Before a problem can be solved firstly steps must be taken to contain it and stop it from getting worse`
Difficult problems resulting from accumulation over long years of misplaced economic priorities have no easy quick fix lasting solutions. Ultimately the cash flow problem can only be solved through regeneration of economic growth which would restore profitability and confidence to make the cash flow business cycle turn again with` momentum.
Clearly this is easier said then done.` But let me outline three important points which are necessary to restore business confidence even if this can only be done over a long period of time.
Controlling over-capacity from the supply side
Before a problem can be solved firstly steps must be taken to contain it and stop it from getting worse.` It is therefore important that new investment, especially that targeted for production of goods and service to be consumed by the domestic market, should not be encouraged if it only serves to increase the over-supply.
I am therefore quite in agreement with the credit policy recently adopted by the` main banks not to finance new projects unless there is a strong cash contribution to the investment cost by the promoters. Perhaps this policy ought to be applied less rigidly where the project is earmarked for export market or for the tourism sector ( which is an indirect export).
Helping existing project who are suffering from cyclical problems
`Banks should stop trying to get blood out of a stone by making impossible repayment and security conditions`
This is where banks are failing. Rigid policies regarding new projects does not mean that the same rigidity should be applied to existing projects where the investment has already been made and the project is finding cash flow difficulties to service its commitments with the banks.
Banks here have to be very judicious in estimating whether the difficulties are cyclical or structural. In case of structural difficulties where the problems result from not carefully thought out` projects or incompetent management, banks have no business to prolong existence through continued avoidance of economic reality.` Banks cannot be expected to risk their own capital and their depositors funds in projects that do not present a reasonable expectation for economic viability in the medium term,` even when the macro-economic situation returns to normality.
On the other hand,` for projects that are undergoing cyclical cash flow problems,` banks have to be more than lenient as these project need to be around to push the economy forward when normality re-establishes itself.
Banks should stop trying to get blood out of a stone by making impossible repayment and security conditions and by increasing the interest burden at a time when businesses need help not obstacles to quicken the bounce from the bottom of the cycle.
The banks` insensitivity in such cases is prolonging the economic downturn and making recovery that much harder,` as new investors are scared off and existing investors are disheartened right when they need to be encouraged and supported.
Credit regulations
`The last suggestion I make to ease the cash flow problem is the promulgation of credit regulations`
The last suggestion I make to ease the cash flow problem is the promulgation of credit regulations.` These are now being adopted by many countries, including the EU and such regulations are particularly helpful to small businesses that cannot compete with the big business that offers extended credit terms.
Such regulations would provide that for regular business transactions regarding ordinary recurrent supplies ( as against investment` supplies for capital expenditure where one can understand that extended credit terms have to be offered) the credit period would by law have to be stipulated at a short number of days ( normally 45 days) and that it would be a sue-able offence for anyone not to pay a recurrent due within 45 days from the underlying date of` supply.
Credit regulations would also provide for payment record` information to be more accessible to the public under controlled circumstances, to ensure that the grantors of credit can base their` judgment on an informed basis regarding the payment record of the prospective client.
Above all
`Clearly this cannot be done by the present fatigued administration`
But above all the cash flow problem can only be resolved if the above three suggestions are framed within a much larger economic recovery plan which is championed by the government and commands the support of employers and unions in due acknowledgement that failure to engineer a recovery would be damning for all.
Clearly this cannot be done by the present fatigued administration and if they truly believe in the protection of our children from the economic collapse which they are so expertly creating, then they should admit that they lost creativity and zest, and make space for a new administration that is rearing to go.
As for the EU project, it, like heaven, can wait.
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