Cash & Liquidity Management

Crisis to Competitive Advantage The roots which have anchored almost every organisation have been ripped from the ground during the current crisis, leaving many governments, regulators, banks, large corporates, small firms and individuals alike with a sense that much that they have relied upon to fuel their business, lifestyle or economy has been taken away. In particular, cheap credit has nourished the liquidity requirements of companies and individuals in the past. Now that credit is less widely available, and more expensive, liquidity has become the top corporate priority.

Crisis to Competitive Advantage

"Difficulties strengthen the mind as hard work strengthens the body"
Seneca, 1st Century Roman writer

by Erik Seifert, Head of Cash Management, Sweden, SEB

The roots which have anchored almost every organisation have been ripped from the ground during the current crisis, leaving many - governments, regulators, banks, large corporates, small firms and individuals alike - with a sense that much that they have relied upon to fuel their business, lifestyle or economy has been taken away. In particular, cheap credit has nourished the liquidity requirements of companies and individuals in the past. Now that credit is less widely available, and more expensive, liquidity has become the top corporate priority.

The Crisis Begins

Although we have been discussing the crisis for eighteen months or so, the impact in Europe was largely restricted to the banks, with the “real” economy generally unaffected. In October 2008, however, the crisis seemed to sweep through the economy, buffeting virtually every industry. Since then, many of our customers have indicated that the slow down in their business during the last quarter of 2008 has been tremendous and unprecedented, and the start of 2009 has not revealed a shift in fortunes.

What has been remarkable is not just the degree, but also the speed of change. For example, one treasurer said that September 2008 had seen record high levels both of sales and collections. Only a month later, October was the worst month the company had experienced in many years.

The Race for Working Capital

Such a rapid slow down has brought major changes to working capital needs. Inventory and receivables have grown quickly and firms have been unable to adjust in time. This has resulted in some companies experiencing serious financial issues and having to make major adjustments in their cost structure.

Well run companies, with the right products, supply chain, customer service and effective cash and liquidity management will survive the crisis.

The best-managed companies are now rapidly turning their attention to working capital management, if they have not already done so. Cash flow forecasting, for example, has become critical. Treasurers need to focus on whether they have identified their “worst case” liquidity requirements, and ensured that an appropriate buffer is in place. Furthermore, it is vital to ensure that the right banking relationships are in place to support the company through difficult times.

Liquidity forecasting and unlocking working capital, such as from inventory or receivables, are amongst the areas in which SEB is helping to advise its’ clients. Working capital initiatives can deliver substantial benefits, both in providing liquidity and in strengthening the supply chain. For example, larger companies are increasingly seeking to provide support to both suppliers’ and customers’ liquidity needs to secure both supply and demand, ensuring that the supply chain is as robust as possible.

However, although there are undoubtedly opportunities to release working capital, easing the pressure on external financing, it is often difficult to decide where to start. SEB’s proven Corporate Value ChainTM concept, in which we use a systematic approach to identify, prioritise and deliver improvements to financial processes, is a pragmatic approach for releasing working capital and creating additional value. Many of our clients have experienced dramatic improvements in process efficiency, liquidity and risk management by working with SEB in this way.

The Corporate-Bank Partnership

Another outcome of the crisis is that companies have become more concerned about the banks with which they work, including where they place their cash and the stability of their cash management services. Increasing numbers of companies are relying on SEB as a repository for cash, credit and cash management services. We have increased our corporate lending by a significant amount in the past year to try and fulfil the need for additional credit, sustained by a strong balance sheet and liquidity profile.

Building a Stronger Future

Well-run companies with the right products, supply chain, customer service and effective cash and liquidity management will survive the crisis and in many cases, have a stronger business with which to move forward. None of us know when the crisis will be averted, and when better times will return. What is certain, however, is that the new world will look very different to the old one. Business success will be driven by sound business practices, clear corporate objectives and cash and risk management policies aligned with these objectives, rather than relying on a stream of cheap credit to support the business. In this environment, we are focused both on supporting our customers through difficult times, and enabling them to use the downturn as a competitive opportunity rather than a commercial threat.

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