CREDIT RESOURCES.

Auckland Star, Volume LXIX, Issue 280, 26 November 1938, Page 25

CREDIT RESOURCES.

POINTS FOR BUSINESS MEN. OVER-SPENDING OF CAPITAI* Some prood advice for business men is given I>v Mr. C. T. Ban«owcliff in the "Incorjtoratcd. Aet'onntante' Journal' - (Liondon). "A point to watch," he writos. "is tlie ovpr-tspendiiirr of capital by the up of "the credit resources of tile busintvs. There is considerable <lan,ircr in tliis proceri* even if it is for expansion or development. A sudden hitch or iiiK'X|K'cted circumstance and capital lnav l>e needed to tide oxer a temporai v <lißi<Milty. With the credit resources used up this mipht then )>e ail enibarrassinent and many cases have been known of liquidation, although clearly there appeared to be no insol-vency—-only ;i shortage of ■ liquid resourccf-. "It is well to remember that the alisence of liquid resources can be a caiis ( . n< liquidation just as much as insolvency. The auditor's responsibility is to advi-e along the lines which will stoer clear of such danger. There should always be something in reserve, sometiling which can be pulled out in an emergency. Properties free of mortgage, for instance, would form a reserve of credit. The margin of credit for each business would naturally depend upon the particular business. "It is the auditor's duty to advise caution in the raising of capital on the credit of the assets. Jt is so easy when business is running smoothly to charge the assets and business for what seem ■to be desirable extensions, but care must bo exercised to see that there still remains suHicieiit margin for future borrowing to cover emergencies. And it ilias to be remembered in considering this point that the value placed on the assets is important. Some regard must | be paid to the probable value of the I assets at the time, of an emergency.

"Then* is a difTerence between the value of assets of a highly-successful business and of those of a business which may be passing through a critical period. In the latter case, a forced sale is always nearer the mind, and the value of the assets is naturally beginning to have the flavour of forced sale value rather than of value as a going concern. So that there must be borne in mind, in considering the safe charging limit of the assets, the probable value of those assets in a time of emergency. Many may have had some experience of the principle adopted by banks in valuing assets for loan purposes. In nearly all cases the banks take the forced sale value and experience has shown the wisdom of this practice. Generally speaking, it is a fact that banks are interested in the assets only when they have to be realised, and therefore they regard the realisable value as the basis for lending money. It is quite a good thing to keep that practice prominently in mind in considering the advice to tender to clients when capital is to be raised on the securitv of the assets.

"Tn 'the experience of many of us. businesses have been built up to big dimensions by conserving the profits of the business itself and without the aid of any outside capital at all. Whilst this is essentially sound it must be admitted that business, progress can lie assisted by the judicious use of loan capital.