Virus catches messy expansion unawares!

Mr and Mrs X are running multiple businesses. There are various verticals in those businesses. Promoters have liabilities of Rs 60 lakh towards different departments. Books show profit but there is a cash crunch to the extent that he is not able to pay even taxes. Liquidity has just vanished. Why? There was a constant flow of funds for big projects he undertook. But, he chose to expand other businesses from these funds. While the new venture was yet to generate revenue during the gestation period, funds required to clear dues of the old venture got stuck. He borrowed from the bank and managed both businesses. As he got business funds now from both ventures, he started a third venture. But, the cash flow was not sufficient to sustain all three businesses. He again got stuck and was forced to exhaust his limit of borrowing from the bank and other sources. The borrowings were consumed in servicing his dues. In one of construction businesses funds got stuck after the completion of work. The developer did not pay the full amount. For some reason, the developer made a part payment. Now promoter of businesses was trapped as the borrowing limit had already been exhausted. While there already was a financial mess, COVID-19 brought everything to a grinding halt. Payments to banks and government dues were difficult to clear. The head accountant for all ventures could not maintain proper watch on cash flow positions on each venture. The picture of each venture in terms of cash flow was unclear. All accounts got mixed up. Proper information of fund flow to decide what to do was just not there with the promoter. The chartered accountant does not have a clear picture of the entire and individual scene. As a result, the promoter is not getting proper advice of the Chartered Accountant. The business owner now has more liabilities than in a normal case towards tax authorities and the government. There is no proper track of funds of individual business going to others. It is either not clear or messy.

Why this mess? There are a number of wrong decisions at wrong times. Business expansion and diversification has to be done with extreme care taking help of professionals so that a profitable business does not turn red to sustain an uncertain new venture. The new venture is yet to be tested while the tested and profitable one is being made to bleed.

There are number of issues involved and lessons to be learnt from this case study: don’t jump to a new business merely rotating funds of other businesses. Even if one has to, try seek expert advice on proper fund flow planning.