The government announced not so long ago a number of measures and policy changes, all of which were geared towards increasing the general liquidity within the economy. However, whilst they have had some impact, many of our banking institutions do seem to be reluctant to lend to each other and to us.

This is reflected by the gap between the Base Rate and the London Inter-bank Offered Rate (LIBOR), which has been at its largest for many years.

As banks and other lending institutions slow down their lending to companies liquidity will become a significant issue for businesses. At the same time we have seen instances where credit facilities and loans have been restricted as banks become more selective about those they provide funding to. More recently we have seen examples of financial aid packages that the banks have turned away which may have been approved more readily by banks 18 months or so ago.

It may be that companies look towards equity to inject cash into the system, as many of the banks have done with recent rights issues. For those companies that cannot access equity funds alternative sources of cash must be identified, and plans put in place to ensure they can be accessed. 

Working capital management

One of the most readily available sources of cash that can be accessed is contained within the working capital of the business. By setting a strategy for and managing the collection of debts, the payment of suppliers and management of stock, cash can be accessed and utilised more efficiently.

Making better use of cash in this way will become more important for the finance role-holder. In addition to working capital management cash flow forecasting and, in particular, the forecasting of future cash requirement will become vital.

Whilst most businesses will have longer term cash flow forecasts that illustrate future cash trends and enable them to plan capital expenditure and other investments, shorter term forecasts that focus on known cash flows over much shorter periods will become much more important for predicting future movements in cash.

Focusing on shorter term cash flow planning will enable management to focus on, and identify, blockages within the system. Once identified, blockages can then be worked on to free up valuable cash reserves.

Funding

The funding of both investments and working capital will become more difficult as lenders restrict the supply of funds. It is therefore vital that funding requirements are identified early and planned for.

Close monitoring of headroom, the difference between agreed facilities and actual balances, on a week by week basis will become an important role of the finance department. Perhaps more importantly though will be the identification of spikes in cash flow requirement that might quickly absorb headroom. Longer term cash flow trend forecasts, that will sit alongside shorter term predictions, will enable management to identify distant cash flow requirements.

Once identified both short and long term requirements must be planned for. Instead of just having a plan A, alternative funding plans should be considered. Having a plan B, C and D, which can be executed at a moments notice, will ensure timely action is taken when the pressure is on.

Finance teams should be more creative in their funding plans and should make the best use of a mixture of funding options; confidential invoice discounting, factoring, sale and lease back, asset finance, in addition to more traditional development loan and overdraft facilities.

In depth and regular discussions with financiers will enable a management team to identify how relationships are panning out and will enable a team to evaluate offers. How a bank or financier may position themselves in negotiations will also be important. If there is a good relationship in place difficult conversations will be easier and “long no’s” will be less likely.

Cash investments

For those businesses with cash this is not a time to sit back and take life easy. Cash will become a more important and valuable commodity that must be protected. Chasing high returns may not be the most sensible strategy in the current economic climate.

It may be more appropriate to evaluate how credit-worthy an investment is, or to look at the credit ratings of banks that hold your investments. Putting eggs in different baskets may also be a strategy that is adopted.

Whilst there has been much commentary on the current economic conditions there has been little said on the future and when the current liquidity issues may start to unwind themselves. It is therefore vital that, wherever your business is in the current climate, finance is placed high on the agenda of strategic and management meetings.

Keeping abreast of developments and trends in the wider economy, and monitoring and controlling cash flows and cash balances within the business, will help assist finance role-holders mitigate the financial risks of the current climate.