While everyone knows that "cash is king," the other golden rule you also need to understand is that corporate liability will protect you personally only if you remain within the law. So when times get hard, stay honest.
What the law, quite rightly, does not allow you to do is abuse it and conduct business when you don't have the money to meet your creditors—this is called trading insolvently. It's also fraudulent to use money you don't have. Directors of firms have the responsibility of knowing the trading position of their firm at all times. Having said this, most firms will, at some stage, trade while they are technically insolvent. There are three types of breach. It is important that you can recognize with which one you are dealing.
♦ The stretch (a trivial violation)—A client is late with a check, sales this month are low, but the forward order book is strong. The firm doesn't have the funds to cover its overheads; technically it's insolvent. Provided the situation is transitory and you lend the firm the money or your bank manager gives you a temporary overdraft facility, you should be alright. Even so, discuss the situation and agree on a course of action with your other directors. Providing the loan is repaid, preferably with interest, it's irrelevant.
♦ The tight rope (worrying)—The situation here is less clear-cut. The firm is running short of money. Although the future is rosy, you have no idea how long it will take for the balance to right itself. Again, discuss the situation with your fellow directors and agree on a course of action; then inform your accountant and confirm it in writing. Get his view of the seriousness of the situation.
♦ The void (whoops!)—If you are already overstretched, the future looks dim, and there are no easy marketing fixes, call a crisis meeting. Arrange an immediate discussion with the company accountant and your directors. Consider very seriously pulling up stakes while the firm is still technically solvent. It's cheaper to call the administrators in and close it down.
Money is every software firm's Achilles heel. Money gives you altitude. As you lose height nothing adverse seems to happen. For a deceptively long time you still feel free to do anything. Then suddenly the ground is coming at you at an alarming rate. If can't pull out of the situation very, very fast, wham! You're dead. While we have all used money from the day we bought our first package of candy, managing corporate money is an altogether different business. As an individual if you fall on hard times, the state will come to your assistance to some degree. If this happens to a business, it is terminated. There are no safety nets or second chances.
Financial shortages have been known to affect even the most outwardly healthy and well-known firms. If you miss a deadline, a major client pulls out of that megadeal, or you stop managing your creditors, but you still have money in the bank, you're safe. If you don't, you're history.
The accrual, spending, and overall management of money, therefore, require special consideration; so let's start at the beginning. There are a couple of words used a lot in this chapter that you probably know, but their meaning runs counter to our instinctive expectations:
♦ A debtor—Someone to whom you owe money
♦ A creditor—Someone who owes money to you
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