Uncertain times during this economic downturn have caused liquidity issues to become a serious risk to all companies regardless of industry sector. Few top executives have faced a crisis like this and are shocked how slow revenue and frozen credit can blossom into a full blown tornado.
But staying afloat in this environment requires a thoughtful and proactive approach that anticipates problems and creates solutions before liquidity issues get out of hand. Here are a few warning signs to watch out for and strategies to help you through these economic challenges.
First, watch for the financial red flags in your company because banks have less tolerance for borrowers with issues, and loan renewals are by no means automatic. Are you looking at your receivables, collections and doubling efforts that your accounts don’t go past 60 days old? If you are taking on new customers, make sure you set clear guidelines with them before extending credit to prevent issues in the future.
In every organization, doing a cash forecast based on current financial status, industry trends and forewarn problems should be a core competency in any business.
Another helpful tool is to develop a cost of capital and return on investment model so that you can see if asset purchases or staffing additions you plan to make are worth it in the end. This return on investment model also helps when considering raising additional capital such as bank debt.
One way to prevent unnecessary spending in a down economy is to obtain value from your past investments. For example, many firms can realize incremental value from existing technology without investing more money into it. It may be you are not using your software to help you manage your money better. To remind customers to pay on time, you may consider setting up e–mails with reminders that accounts over a certain period could accrue interest or go into collections.
A few creative ways to find hidden liquidity is to scour the balance sheet for assets you can sell or liabilities you can extend. Cash is king, so try collecting payments from customers faster. If there is slow moving inventory still sitting around, reduce prices so you can turn it into cash quicker. If you find that you have an excess of inventory, maybe it’s time your staff re–examines if they are pricing product properly for today’s competitive environment.
If you do find you are hitting financial roadblocks, communication is critical on all levels. Initially,, try brainstorming with your management team and ask your staff if they can identify ways to increase revenue and reduce spending. Also, when dealing with lenders and stakeholders in a financial crisis, it’s best you offer an honest assessment of where the company stands in order to build stakeholder confidence. Your stakeholders should hear your situation from you first and not your competitors.
As a reminder, while you may have your financial house in order, lenders are currently in turmoil with their own liquidity management issues. The decision process may no longer be in the hands of your loan officer or relationship manager. If you have a financial issue, your lender’s response might not be consistent with their past actions.
More importantly, don’t wait until the last minute to find alternative financing strategies if your lenders have tighter restrictions. There is still money out there, but it takes time and persistence to find appropriate sources.
If you feel you don’t have the internal resources to handle the current financial crisis, consider bringing in external help such as a certified public accountant to assist what is likely to be an overextended financial team.
A third party perspective helps to contribute to the organization real time market data and objectivity. Many owners get in crisis management mode and cannot see the forest for the trees, and tend to move from one fire to the next. A CPA can help you strategize and examine the tough questions like what the trends are in the industry, how are your customers doing, and if you need to reduce in staff or raise capital.
