The Liquidity and Funding How-to in Times of Crisis
How corporate treasurers are shoring up liquidity and getting their cash
According to the Strategic Treasurer Global Crisis Monitor survey, A/R concerns and bank credit questions have been amongst the top concerns for corporate treasurers in the COVID-19 crisis since the initiative was launched in March 2020. This is an unprecedented scenario in the sense that companies of all sizes, all industries and all countries are affected at the same time. Consequently, they’re also all competing for funding from banks, capital markets and national emergency funds at the same time. This has serious implications.
From textbook to real life: the “pandemic scenario”
Within the space of weeks, the obscure “global pandemic” textbook scenario of university business and finance courses has become a terrifying reality. Companies have had to adapt in ways they had never envisaged and all eyes are on the cash and liquidity situation. The humble and often unloved cash management has overtaken more glamorous disciplines such as currency hedging or strategic risk management. Companies now face three crucial questions:
- 1 How can I ensure cash and liquidity?
- 2 How can I get funding from banks and capital markets?
- 3 How can I leverage national emergency funds?
What to do if you were caught unaware
Companies who – and there are multiple reasons for this – lack system-based cash visibility or who have not engaged in comprehensive scenario analyses and planning are off to a slow start in the current funding race. So, what can you still do if you’ve been caught unaware?
- Get as much cash visibility as you can
Simply put, you need as much cash visibility as you can get, by any means possible. You may not have a TMS in place that provides you with group-wide, real-time data but in times of crisis anything is better than nothing! If you don’t have the option of introducing a system, you may have to tediously collate data by email or spend hours on the phone, but if this is what it takes, then do it. Get that data, even if it’s incomplete, and do short-term cash management, using the 80/20 rule, ensuring that the most relevant cash accounts are reported in some shape or form.
- Communicate with your entities, banks, suppliers and clients
Another important rule: talk! Talk to your entities, banks, suppliers and clients and keep everyone in the loop. You’re all part of extremely vulnerable supply chains: If one party crashes out, the whole supply chain breaks down and everyone else might go down as well. Make sure you communicate and remain transparent. If you cannot pay, then at least let the other party know, so they can make arrangements.
- Do basic liquidity planning
One more thing you can still do is set up some kind of basic liquidity planning. Again, this is no match for a system-driven, comprehensive setup, but it is better than nothing. Even if you only have 2 categories (incoming and outgoing cash flows), this still teaches you at least 4 things (higher incoming vs. fewer outgoing cash flows or fewer incoming vs. higher outgoing cash flows).
During a time when everyone is competing for funding, being able to show some insights from your cash management and at least basic liquidity planning might make the difference between getting funding from a bank or not. They want to see that you’re trying, that you’ve put in some thought, that you have some kind of idea of what’s likely to happen to your company.
The value of good preparation
Unlike those caught unaware, companies who have a TMS in place and who’ve previously engaged in sound cash management, forecasting, liquidity planning as well as scenario analyses have a head start in the funding race.
- The value of complete and real-time data
These companies are able to trust their data rather than spending precious time collating it. In times of crisis, speed and reliable data are of the essence. We may be living through unprecedented times and no one knows what’s going to happen, but at least with good preparation you’re not flying completely blind and can focus all your efforts on those crucial decisions that result from your data.
- Use more granular scenarios and planning
If you have the right data at hand, you can be much more granular in your scenario analyses. As you don’t need to worry about the bottom line, you can dig deep. The same goes for previously set up liquidity planning. You can now use what you have and adapt it to the needs of the crisis, for example by applying shorter planning intervals.
- The value of good relationships with banks and entities
A strategic approach to bank relationship management now also pays off. If you have a good relationship with your banks and financing partners and are more than an anonymous number, then you’re more likely to get the funding you now need. Likewise, a good relationship with key stakeholders in local entities will now make all the difference.
Where can I secure funding?
- Obvious funding choices: banks, capital markets and beyond
Knowing both your external and your internal funding structures is enormously helpful in this crisis and all of the above tips can bolster your position. Obvious funding options can be found in banks and capital markets, either with existing or with new financing partners. This is also an opportunity to potentially diversify a funding portfolio but there are also other, internal ways of freeing up funds. These include postponing investments, reallocating funding and identifying headroom as part of existing funding agreements.
- National emergency funds
Whether prepared or not, one option currently available in many countries are national emergency funds. Many countries have put in place great schemes, including the Covid Corporate Financing Facility (CCFF) set up by the Bank of England or the Coronavirus Aid Loans for companies in Germany. However, corporates should be aware that there are complex requirements and interdependencies.
For example, being granted aid in one country may preclude support in another. What’s more, it is partially unclear exactly where multinationals are entitled based on their headquarters and offices. Some groups have had to go as far as splitting off businesses or founding financing companies in order to participate in several countries’ funding programs. Funding through these schemes really needs to be looked at on a case-by-case basis.
Lessons to learn for the future
It may be hard to imagine right now but even this crisis will pass at some point. And there will be lessons learned for everyone.
- Cash management as an element of risk management
Some companies haven’t bothered with liquidity planning and risk management for years because they were sure they had plenty of cash. One lesson from the crisis is that everyone should view cash management as an element of risk management and not take excess cash for granted.
- Prepare for the worst when things are going well
Another important lesson is: prepare for the worst when things are going well. After the crisis is the time to revisit technology and processes: do you want to invest in a TMS? How can you optimize your liquidity planning? Do you want to introduce intercompany netting? Do you really need 80 banks? Take the time to make these decisions while you’re not scrambling to keep things going.
- Stress-test your back-up plans
No matter how well prepared you were, there are always lessons to be learned. For example, you really need to stress-test your back-up plans. If you have a credit line in place but never draw down, you have no way of knowing if it will hold in times of crisis. Make use of the lines in good times to test them. Also, run scenarios, determine where your comfort level is and where your minimum requirements are. Use the figures you have to look at everything. Make sure you not just assess your risk appetite but also your overall risk capacity: how much do I need as the bare minimum? What are my internal and external debt obligations?
- Revisit your banking relationships and funding choices
One more thing you can do after the crisis: take another look at your banking relationships. What paid off in the crisis? Who could you lean on and where did you receive the funding and support that you needed? In addition to banks, also look at other options. For example, you maybe want to consider capital markets more closely moving forward.
In an economic crisis, liquidity and funding are even more crucial than at normal times. While companies that use a TMS and have made preparations during good times are obviously better placed, there are still options for everyone to catch up and ensure liquidity. What is important is that any short-term measures are followed up with a thorough analysis later, so lessons can be learned.