Financial Magazine

Crisis management of liquidity

Introduction
Every company experiences cash flow squeezes which needs to managed. The way these squeezes are managed have a large influence on the future of the company. It often takes “out of the box thinking” and professional assistance to solve the problem because time is too short to concentrate on the continuing business and focus on successful solutions. Liquidity squeezes that keeps on going destroys the value of the company because management spends less time on the core business and quality products tends to be out of stock first.

8 ways to approach the liquidity crisis:

1. Raise new debt
2. Raise new equity
3. Sell assets
4. Stock clearance (discounts)
5. Accelerate receipts (offer discounts)
6. Defer creditors
7. Restructure your terms of trade with suppliers and clients
8. Cost severance

Which solutions solve the problem

• Number 1 to 3 solves the problem if cash flow if sufficient after one of these measurements are taken.
• Number 4 to 6 buys you time but solves or even worsens the chance of survival
• Number 7 & 8 should have been implemented anyway

How to deal with banks and shareholders while confronted with a liquidity squeeze
Banks and shareholders don’t like surprises; therefore management should go to the bank asking for extra limits before the liquidity squeeze really starts to hurt. This will make negotiations easier. When the entrepreneur ask for money while in the squeeze, the bank and shareholder will ask themselves: how will the management, who got us in this situation will get us out of here?

Small companies however should always put money aside on their personal account. Because, usually banks ask small companies to deposit private funds before they are willing to invest.

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