Liquidity crises are usually the symptoms of underlying strategic and operational crises that must be tackled to avoid repeated cash crises.
The levers to address liquidity crises are not just operational and financial but also behavioral.
CFOs must recognise the liquidity crisis and communicate openly to crucial stakeholders as a first step; they need to build trust with current and new financing stakeholders by producing a predictable rolling liquidity forecast.
The control of cash requires very conservative cash authorizations and aggressive control from the financial team on all operations.
Reducing net working capital is a well-known source of cash, but requires care to avoid deteriorating relationships with clients or suppliers.
Restructuring the balance sheet is a medium/long-term solution. It mainly involves selling assets and raising/refinancing debt and/or equity.
Until 2007, debt had become very cheap and accessible. Most companies sharply increased their leverage. In Germany, for example, the net-debt-to-EBITDA ratio extremes moved from around 3 in 2002 to around 7 in early 2008. However, a downturn in company performance or an external financial crisis—where lending becomes scarce and borrowing expensive—can make this approach risky.
What Is a Liquidity Crisis?
A company’s liquidity is its ability to quickly pay off its short-term debts as they fall due, and still have enough cash to keep operating. Liquidity crises can be broadly split into company-specific crises, and those driven by external factors—by market or general economic changes. In both cases, the company experiences a loss of investor confidence, making it difficult to raise further cash. If the company has insufficient cash reserves, it can very quickly run into serious difficulty. A familiar vicious circle takes hold, where a company cannot pay its debts because it has no funds, but cannot raise funds as its financial difficulties result in the downgrading of its debt.
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