Equity Capital: Where’s it at?

July 22, 2010, 12:00 am

Small Business Finance & Profitability

By William Stong

At the end of the day, if the negative pressures on your company’s profit require you to access the equity-capital you built up over the years, where’s it at? How do you tap that safety net?

Liquidate assets

Basically, you draw down your assets to pay for the negative profitability that is pounding your company. The first asset, of course, is “Cash”:

● Use cash to pay expenses

● In order to keep the Balance Sheet in balance, equity-capital will decrease

(NB: let’s ignore the complicating reality that many of these transactions will flow through “Accounts Payable” liabilities first. The point here is that eventually, when revenue is less than expense, equity-capital will ultimately be used to fund the negative net-profits).

Assets have different liquidity characteristics. With the most drastic scenario, equity-capital is accessed by liquidating all assets and using the proceeds from those asset sales to pay off all liabilities (or as many as can be paid off).

Whatever is left is equity-capital: positive or negative.

Bill

William A. Stong

Email: william.a.stong@gmail.com

SBF&P # 72

Telephone: 925-202-6244