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Hardman & Co Insight: “ROOM” (Running Out of Money) risk

How managing liquidity risk can sustain corporate value and maintain shareholder confidence

As we come close to the end of a very challenging year for many UK entrepreneurs, as well as a frustrating period for shareholders, it is time to address one elephant in the ROOM!

ROOM stands for “Running Out of Money”. The risk of doing so, or the perception that it could occur, can destroy corporate values and prematurely paralyse a business. While this is a new description of the traditional references to liquidity management, ROOM risk accurately describes a growing and troubling problem. Details of emergency corporate fund raises regularly feature in the financial press, and the failure rate of businesses in the UK is worrying. While appreciating that companies fail for a multitude of reasons, a key factor is often the lack of cash resources.

It is worth making the distinction between cash and assets. A company may have a strong balance sheet (leaving aside the issue of the correct valuation of some assets), but it needs access to cash or very liquid assets to meet the demands of suppliers. Without cash, or money as we call it here, its business will “gum up”.