You’ve missed my point.Companies generate cash from sales. If they are not generating sales, or if sales (and therefore revenues) are reduced, then they have very few options open to them:
Cash is returned to shareholders in dividends (private company or publicly tradable on the FTSE or on AIM in the case of the UK). Shareholders can sell shares where a company is listed or at IPO (Initial Public Offering) or realise their investment on sale of the company they have invested in in an M&A situation.
- Burn reserves
- Reduce costs
- Raise money
If you look at the companies going to the wall or in trouble, their revenues are down which means they need to raise cash - either from issuing new shares or from loans. Debt is generally considered preferable to equity. No-one likes to burn reserves and any company with more than three months cash reserves is doing OK - irrespective of size. Three months minimum is what your CFO/FD should look to have in the bank.
The moment a company is in trouble, the vultures descend - it is not pleasant to watch. All shareholders know that shares can go down in price as well as up. Investing is a risk. Everyone is happy when its 'make hay' time, and the moment there is a sniff of trouble, everyone wants their money out and they piss and moan. There are many factors influcing share price.
Irreducible cash burn is irreducible. There are no costs left to cut.
Raising debt is near impossible if your turnover has crashed by 90%. Selling equity is near impossible if you are approaching insolvency.
When the cash runs out, it’s run out. That is the situation in which many companies find themselves.