Protecting liquidity in tough times.

• Author: DiPietro, Janice
• Position: Treasury

In a year of recession and credit uncertainty, understanding and managing liquidity has become a top priority for most treasurers. Many management teams were shocked to learn just how quickly slowing revenue and frozen credit can blossom into a full-blown crisis.

But the good news is that when treasurers take a proactive approach, they should be able to devise solutions before liquidity problems reach a crisis state.

Remember that lenders are facing their own liquidity-management issues. With impaired balance sheets and less available total credit, lenders are concerned about their futures, too.

Moving an account to workout is riskier today than in the past when many credit decisions were substantially controlled by a loan officer. Now these decisions are often controlled by a risk officer or credit committee. Either way, be prepared for significantly increased scrutiny.

Early Warning Signs

Forecasting cash flow, while more challenging than ever, must nonetheless be a core competency involving all critical disciplines--not just Finance. A foundation of objective information and rigorous forecasting practices is imperative to anticipate problems and devise solutions.

Forward-looking analysis and projections based on real data--not estimates--must be the starting point. Projections must look ahead at least four quarters, using run rates as much as possible. Understanding the full spectrum of possibilities helps prevent surprises that reflect badly on the Finance team.

First, assess base-case projections. Do they exceed liquidity/compliance mini-mums? Are there potential debt covenant issues? What has to change to preserve working capital without crippling the business?

Also examine worst-case scenarios, including the impact of lower asset appraisals and reduced availability of credit. Document assumptions and estimates to challenge them as circumstances change. This analysis is time sensitive and needs to be based on market conditions, including the impact of these conditions on the customer base.

Consider bringing in external help to assist an overextended financial team. Quick and decisive action reflects well on financial leadership, especially when there are ongoing news reports of organizations that failed to take decisive actions early to "right the ship."

Cash is King

Ensure your financial team is focused on cash and working capital. Until the credit crunch abates, preserving and improving liquidity must take precedence over earnings...