Potential causes of the liquidity issues

When we talk of a company experiencing liquidity issues, we are referring to a situation in which there are material doubts as to whether a business will have sufficient cash to meet its liabilities which are maturing in the short term while still being able to continue operations or where it will only be able to do so with limited operational headroom.

It is impossible to list all potential causes and their likely impact, as these will vary from case to case. Some may be company-specific and some may be driven by external factors. However, the following are common triggers (which may well be interdependent and cumulative):
  • poor trading performance
  • increases in key costs (materials, labour, energy/fuel etc)
  • repayment/withdrawal/unavailability of material financing arrangements:
    • facilities maturing at the end of their term or scheduled amortisation payments falling due (should be foreseeable but may become problematic if a deferral, extension, refinancing or replacement facilities are not negotiated in good time)
    • uncommitted facilities being withdrawn (eg withdrawal of bonding lines due to concerns over trading)
    • breach of financing arrangements leading to facilities being reduced, drawstopped, cancelled and/or accelerated (trigger may or may not be foreseeable)
  • adverse FX/interest rate movements (particularly if unhedged)
  • commercial counterparty issues:
    • supplier/purchaser disruption – collapse of material supplier or purchaser, shortages of raw materials, other disruptions to supply/delivery chain etc
    • termination or non-renewal of key contracts with suppliers or purchasers
  • litigation:
    • costs of pursuing litigation
    • material payments to be made on settlement or judgment against the company
    • potential adverse PR and trading impact as result of litigation
  • ratings downgrade – relevant to companies with listed securities
  • force majeure/MAC:
    • natural disasters
    • civil unrest/political change
    • market shocks
    • industrial action
    • changes in law/regulation