Cash is king

Many companies will face financial pressure during the economic downturn, yet more than ever, cash is king.

It is commonly accepted that the businesses which emerged as sector leaders after the last recession typically had an average net debt-to-equity ratio of about half of their less successful competitors before the downturn hit. The successful businesses also held more cash on their balance sheet than their less fortunate competitors.

Businesses that don’t manage cash as a priority ultimately may not be able to pay their liabilities and consequently risk being forced into some part of an insolvency process.

Managing cash should be an everyday priority, but in a downturn, even more emphasis should be placed on the following:

• reviewing the adequacy of banking and other financing arrangements;
• assessing whether financing arrangements are appropriate in light of changing circumstances;
• monitoring performance against financial and non-financial covenants;
• communicating openly and frequently with key stakeholders to enhance transparency and avoid surprises;
• adopting a more proactive hands-on approach to cash management, e.g. short-term cash flow reporting and forecasting, immediate investigation of variances;
• aggressive working capital management, i.e. ensuring customers pay to term, securing best possible payment terms from suppliers, assessing adequacy and quality of stock levels;
• reviewing discretionary and non-discretionary expenditure and assessing what the business really needs; and
• enhancing controls over purchasing and order processes (core and non-core) by lowering authorisation limits and introducing greater senior management accountability.

• To what extent am I familiar with our obligations on our existing facilities?
• How regularly am I updating my financial stakeholders? How aware are they of our current situation?
• What opportunities are there to re-negotiate/adapt existing financing arrangements as our business model and trading environments evolve?
• How effective have I been at implementing cash generation/cash preservation initiatives? What more can be done?
• What processes have I introduced to manage cash proactively and to properly monitor progress?
• Am I reviewing our debtor book regularly? Who is managing the process? What targets have been set?
• How effectively are we managing creditor payments? Is there any more that can be done without damaging relationships?
• To what extent have I taken control of inventory management? What is our minimum operating level? What steps have I put in place to achieve this?
• Have we reduced/eliminated any non-core/discretionary expenditure? Who is accountable for this initiative? How much progress is being made?
• Are there any other sources of cash that can be readily accessed? For example, are there any surplus assets that can be disposed of?