This morning I connected to the Tatum webcast on “Protecting Liquidity”.  This is a key area for me, which is evident by the number of postings I’ve done on the subject of Working Capital.  However, this is obviously a pretty hot topic for all since they had to provide overflow lines for those calling in for the conference. While the majority of these points are straightforward, it never hurts to review the fundamentals to ensure you’re not getting so distracted in your efforts. With this in mind, if any company has failed to have many of the points below in place prior to this current environment, I would question their ability to emerge and prosper.

     Although many of the points were a statement of the obvious, there were also some great points that were reinforced during the conference.  As we all know, the Credit and Collateral markets continue to be extremely tight due to reduced values on collateral portfolios of 30% or more. There is also a tightening of covenant waivers, and more often than not, banks are unwilling to waive any defaults on covenant agreements.  Further, as a result of defaults, there are fewer “workout” plans for business, specifically in troubled industries such as Retail, Apparel, etc.

 

Additional presentation points:

-Investment markets are stalled and there is limited or no availability of new deals.

-There is very little DIP financing available, and as a result, BK filings are up 300% in last 11 Quarters. This is also forcing companies to move faster and more directly to a Chapter 7 filing.

-Decisions are no longer made by loan officers, but by Risk Committees and Credit Officers.

-Exit options are limited and fundraising has completely stalled.

-Renewals or extensions on credit lines are no longer automatic…or even existent.

-Penalties are extreme and costs have skyrocketed on credit lines.

-Stay informed of your local and regional markets as it’s changing daily!!!

-You absolutely need to understand your run rates as well as worst-case scenarios and have the ability to take corrective action immediately.

-CFO’s need to incorporate faster cycles of data collection/analysis/hypothesis testing. There’s a strong need for the 80/20 rule and the need to avoid analysis paralysis.

-Involved & guide the team at the top. Highlight incremental progress towards key goals.

-Understand the root cause of problems and not just the symptoms.

-Create action plans with specific steps and accountability.

-Early recognition of issues and address immediately.  Do not ignore issues that could result in further downward spirals.

 

There were also a number of “Must Do’s” cited:

-Be proactive and not reactive

-Drive solutions – not doom?

-Provide Operating Teams w/ info and analysis to drive Working Capital efficiencies.

-Develop a robust FP&A capability.

-Decisions based on knowledge of contribution and Working Capital needs enterprise wide.

-Inventory turnover needs to be fully analyzed.

-Manage Payables at the account level.

-Drive closer relationships with customers.

 

During the call, there were also a number of polls taken with the attending group. One of the questions asked what the larger challenges were in accurate forecasting of liquidity. Of the respondents, 61% cited accurate revenue forecast while another 22% mentioned clarity on eroding profits. Does it make you feel any better that 2/3 of the group couldn’t accurately reflect revenues in this environment?

                Another one of the questions asked about the anticipated success of the recent stimulus packages. Of the respondents, 93% anticipated a “Moderate” to “Little Impact” effect (55% answered to the latter). Only 7% responded with “Significantly”. Certainly not a good indicator from a finance-centric population.

 

                On the upside, closing comments indicated that there are signs that banks are starting an “unfreezing” of credit, forced liquidations are slowing, and there are signs that there are improvements to the consumer credit markets.  While there also signs that commercial lenders are now looking for borrowers, it’s still a fact that the price of credit has dramatically increased, decisions are taking longer, and regional banks are staying within their “comfort zones” as it relates to industry or company size.

 

Thanks for reading. . . .

 

Jeffrey Ishmael