Is prevention better than a cure?

When it comes to our health we get this statement. It doesn’t mean we always abide by it, but at least we get it.

But our financial world doesn’t seem to follow the same path because we haven’t learnt to turn the words into “saving is better than borrowing”.

The world economy has just come through a scary time of collapsing banks, business liquidations and plummeting property prices. It won’t be over until borrowing around the world is fully under control by major governments, and confidence returns.

While we sit in the comfort of our fully mortgaged homes and work to pay off higher taxes in Australia, there are other countries fighting for their economical survival and if they fail it affects us here. It hardly seems fair that we, the average Joe, are punished if others can’t manage their own affairs.

That’s the price we pay for being a participant in the global market. What savings we have can be affected if exposed to investments other than cash.  We need to guard what savings we do make over time so that the risk of infection is minimised.

What if we didn’t have borrowings though and relied only on savings to build our business? My first observation on this matter would be “I don’t believe we would have as many businesses as we do”. There are not many businesses that have balance sheets with no borrowings. Whether we like it or not, borrowing is essential for business survival.

We just need to re-educate business owners into the mode of building their working capital back up to sustainable levels for them to continue business expansion, rather than relying on borrowing the capital required.

Why? Because the way banks have had to tighten their lending criteria, it will be a long time before, I believe, we will see banks happy to lend to business again on the strength of their balance sheet and not their bricks and mortar.

By re-educating into the savings mode we can not only prepare businesses for the next cyclonic typhoon (metaphor for GFC) to hit the economy, but we can start to see stronger businesses emerge that are not always operating with one arm behind their back.

Now there will always need to be levels of borrowing within economies otherwise those investing in cash will be losing out. After all, it takes money to make money. I still haven’t found the money tree that actually grows the money in the first place.

Business just needs to explore its debt ratios and get this mix right so that it doesn’t result in major business collapses in the future – hence prevention is better than cure!

© 2011 Michelle Gargar

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