Greatest joke of the century, an investment of US$42 billion without sufficient working capital. Who is the genius?
Insufficient working capital is the common most cause of business failure. The long-term result of insufficient working capital is that there are limited funds for expansion and the business will find it hard to grow.
Liquidity problems may arise and affect Its ability to pay its short-term debts.
Banks may increase interest charges or impose changes for late payments. Therefore, there is more cash outflow and future cash flow problems may occur.
It was not surprising to read 1MDB’s cash crunch news report. This showed that 1MDB has no business in business since day one when it can’t even comply with fundamental requirements of businesses.
To maintain a current ratio of 2 you need a total of US$41 billion in working capital. Your actual working capital is US$1 billion with a current ratio of 1.02. If you grow 10 percent per year in 12 months you will need US$45.1 billion of working capital. This will keep your current ratio at 2. This assumes that both your current liabilities and current assets increase at an annual rate of 10 percent.
Where to find the other US$40 billion to keep the business floating?
In order to find the necessary working capital, the only way out is to sell Brazen Sky and withdraw the Aabar deposit.
Let assume you received US$12 billion for the sales and withdrawal. Now you reduce your liability to US$30 billion with working capital of US$3 billion.
You may still need to increase your working capital by US$27 billion.
To maintain a current ratio of 2 you need a total of US$30 billion in working capital. Your actual working capital is US$1 billion with a current ratio of 1.03. If you grow 10 percent per year in 12 months you will need US$33 billion of working capital. This will keep your current ratio at 12. This assumes that both your current liabilities and current assets increase at an annual rate of 10 percent.
Whether the annual rate is 5 percent or 20 percent, it make not much different to the working capital requirement.
Where to find the US$27 billion for extra working capital?
A general rule of thumb is to have a current ratio of 2.0. Although this will vary by business and industry, a number above two may indicate a poor use of capital. A current ratio under two may indicate an inability to pay current financial obligations with a measure of safety.
Najib Abdul Razak had better resign now, the 1MDB scandal is too huge for him to handle. This latest revelation about the financial position of 1MDB is simple incredible and makes no business sense at all.
