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Home > Cash Flow Management Best Practice > Navigating a Liquidity Crisis Effectively

Cash Flow Management Best Practice

Navigating a Liquidity Crisis Effectively

by Klaus Kremers

Rolling Liquidity Forecast

  • This is not “just another financial report”: it shows where your company liquidity is—and will be—when negotiating with external and internal parties.

  • All departments communicate their cash impacts (purchasing, sales, operation/investment, etc) and are responsible for impacts and timing.

  • Obviously, take into account business seasonality and a reasonable buffer. Avoid surprises, as one cannot ask twice for an extension of credit lines: the CFO’s credibility would not survive.

  • The frequency with which the forecast is updated depends on the liquidity stretch: daily rolling liquidity plans are usual during periods of high crisis.

  • Carrying out these simple steps properly will put the company in favourable light with banks: a Roland Berger study showed that only 30% of companies with a liquidity crisis have implemented a rolling liquidity forecast.

Case Study

Roland Berger

  • A mid-sized mechanical engineering company with assets of €500m was in a liquidity crisis following two years of losses. External funding sources had dried up due to poor performance. Our project focused on generating cash from internal sources. A team of four consultants released €51m cash in around six months. The methods used for extracting cash included:

  • In the first two months:

    • Putting a cash control and liquidity plan put in place

    • Selling raw materials back to suppliers (€6m)

    • Postponement of non-essential projects (€4m)

    • Review of accounts receivable (€16m) and accounts payable (€2m)

  • Over the course of the next four months:

    • Cash pooling across sites

    • Giving site managers targets for raising cash – further cut in inventories (€12m)

    • Operational and strategic restructuring defined and implementation started, for example loss making activities identified and plans put in place for site and product rationalization

    In the first 12 months, an additional €11m of liquidity was generated through asset disposal, as well as sale and leaseback of fixed assets. Short-term measures allowed the company some breathing space to enable it to find an investor; longer-term measures provided the negotiation basis for the entry of an additional investor. The company is now trading profitably and has a new investor, brought in on reasonable terms.

Conclusion

The outlined approach to a liquidity crisis describes the worst-case scenario. In less severe cases, not all levers need to be utilized. Even in good times, however, the best companies are already using most of these tools.

Making It Happen

A few dos and don’ts that management should bear in mind during a liquidity crisis:

Do

  • Announce problems early and honestly to all relevant stakeholders.

  • Build and monitor a reliable rolling liquidity forecast.

  • Develop an action plan early on to demonstrate control of the situation.

  • Empower managers to look for potential to extract cash in their areas from the bottom up.

  • Maintain regular and open contact with external stakeholders.

  • Be honest with employees and involve them in the process.

  • Perform financial restructuring in conjunction with operational restructuring.

  • Always prepare for the worst: in a crisis situation the worst case is always the real case.

Don’t

  • Ignore the situation hoping that things will turn themselves around.

  • Look for profit instead of liquidity: avoid paying early for cash discounts, and collect value adjusted receivables rather than keep your write-offs down.

  • Throw good money after bad: accept sunk cost rather than continuously burn new cash.

  • Forget to include an additional buffer for peaks in cash requirements in your liquidity forecast: there will always be unexpected events, and most will hit you.

  • Stop spending and investing completely: do not risk a complete breakdown of operations.

  • Look for perfect solutions: take a practical approach, and react quickly to avoid rumours spreading and a domino effect.

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Further reading

Books:

  • Blatz, Michael, Karl-J. Kraus, and Sascha Haghani. Corporate Restructuring: Finance in Times of Crisis. New York: Springer, 2006.
  • Graham, Alistair. Cash Flow Forecasting and Liquidity. Chicago, IL: AMACOM, 2001.

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