Cash & Liquidity Management

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An Efficient Cash Chain Makes for Good Credit CFOs, FDs and treasury functions are coming to terms with the ‘perfect storm’ that currently hangs over the business credit areas and directly impacts their cash management techniques. Though we are now in 2011, rather than abating the storm is still gathering force. So what’s behind this, and how can we weather its effects and sail out the other side without storm damage? What is causing the storm to gather force? We believe there are five major assets.

An Efficient Cash Chain Makes for Good Credit

by John Mardle, Director, Working Capital Optimisation, Develin & Partners 

CFOs, FDs and treasury functions are coming to terms with the ‘perfect storm’ that currently hangs over the business credit areas and directly impacts their cash management techniques. Though we are now in 2011, rather than abating the storm is still gathering force. So what’s behind this, and how can we weather its effects and sail out the other side without storm damage? What is causing the storm to gather force? We believe there are five major aspects: 

Banks are finding it ‘challenging’ to lend to any organisation 

Why? Some key players have voiced their views:

Lloyds CEO Eric Daniels, in response to criticism, said recently that it wasn’t a question of the banks being ‘mean’ but that there is a lack of demand because businesses don’t want to take on debt.

China has produced its own credit rating agency which recently put most European countries’ debt into a ‘poor’ rating category.

BBA Chief Executive Angela Knight has claimed that banks are “providing good finance to viable businesses,” but firms were looking to cut debts due to the impact of recession.

Stephen Green, who is chairman of both London-based HSBC Holdings Plc and of the BBA, explained to Chancellor George Osborne the reasoning behind setting up the new group. In Green’s letter he stated “We agree with you the essential importance of ensuring that credit is available to viable businesses and particularly for the recovery. A variety of factors have an impact on this, and we recognise the collective role we have to play.” You will note the words ‘viable business’ used by different people.


Credit agencies are in disarray

Some major credit agencies are being sued, as a result of the credit crisis revealing the poor processes that agencies adopted to generate credit ratings. This has caused major upheaval for countries and companies alike, so much so that China has produced its own credit rating agency which recently put most European countries’ debt into a ‘poor’ rating category. In another response to the problem, Siemens is following GE and Volkswagen in initiating a banking licence so that they can finance deals with their customers and suppliers without the involvement of banks or other financial institutions.

The reporting requirement for organisations is under scrutiny and even attack

Here we have major auditing companies realising that they will be sued for not identifying cash/credit issues that could affect a company’s status of being a ‘going concern’. The accounting bodies are seeking input from all quarters to establish what reports are needed for ‘tomorrow’s company’.

New challenges

The changed landscape means finding new ways of dealing with customers and suppliers as new technology and the need for lean processes force them to review not just their own commercial terms and conditions but also whether the profitability of certain products, services and customers, once regarded as ‘cash cows’, could now effectively be loss-making ‘dogs’.

Innovative ways of financing supply chains have arisen. Marks and Spencer has just issued suppliers with alternatives to financing their payments through their own financial services division and Rolls Royce has instigated a supplier portal that has a vetting procedure which includes a review by their preferred banking partner. 

In the UK, the sudden swing in spending policies announced by the coalition government is taking its toll. The curtailment of the ‘Building Schools for the Future’ programme has impacted many substantial companies in the construction, facilities management, technical infrastructure and computer sectors.

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