Cash Flotation
Cash flotation is a simple concept that involves using cash to finance a companys operations, either through debt or equity. The idea is to ensure that a company can make payments for its expenses, and can do so quickly and cost effectively.
Cash flotation is very commonly used in businesses of all sizes, from large multinationals to small start-ups. Generally, a key benefit of cash flotation is that it allows companies to access funds when they are needed and helps them quickly cover their operating costs. This makes it an attractive option for companies that need money to cover expenses without having to wait for actual cash flow to come in. However, there are also some risks associated with cash flotation that should be taken into account.
For example, if a company is using cash flotation to finance its operations, its debt levels may increase. This could cause significant financial strain if the company is unable to pay back the loan. In addition, cash flotation can also lead to lower returns on equity, as the company is using its money to pay off the debt instead of investing it in other assets.
Another major risk associated with cash flotation is its inherent volatility. Since the payments are made in cash and not by drawing down on a companys assets, the company could suddenly find itself in a financial bind if payments are not made. This risk increases with the size of the loan, and if too much flotation is used, the debt burden can become unmanageable.
Finally, there is also the risk that a company may be unable to generate enough revenue to cover the payments. This could leave them in a precarious situation where they are unable to make their loan payments, and could potentially lead to bankruptcy.
Overall, cash flotation can be a useful tool for businesses to manage their expenses, but there are also significant risks involved. It is important to consider these risks carefully before committing to a cash flotation scheme, and to make sure that the loan is structured in a way that keeps the risks at an acceptable level. Additionally, companies should also maintain a healthy cash flow to ensure that they are able to cover the payments if they are needed.
