How to preserve cash

In the event of a liquidity squeeze, the pressing need is often to enhance the amount of free cash available relative to payments falling due. The business can try to achieve this in two ways - reducing outgoings and/or increasing liquid assets.

It is wise to follow the maxim "cash is king". It may well take time to source new funding (or otherwise monetise assets), so the company will need to monitor and manage its cash flow extremely carefully, seeking to preserve existing and incoming cash and restrict outgoings.

The following measures may be beneficial:

  • assess the adequacy of the finance function and internal reporting:
    • is the existing finance team strong/focused enough? Consider changes/additions
    • how rigorous are cashflow monitoring and forecasting processes? A key problem for many businesses is the inadequacy of rolling short-term cashflow forecasts (showing weekly cash movements over the quarter) - producing a proper forecast may be useful both internally and to restore lenders' confidence
    • consider intra-month cash movements and upcoming pressure points
    • engage financial advisers to assist with cashflow forecasting and management. This may in any case be required by the company's lenders
  • if your company has material third-party financing facilities, consider the position as a matter of urgency:
    • are your company's liquidity issues directly referable to those facilities eg are there scheduled repayments to be made or is the company in breach, with lenders threatening to accelerate?
    • if the liquidity issues stem from other factors, is the company likely to breach the facilities as a result of those factors or the resulting liquidity position?
      • engage with lenders with a view to seeking a temporary or permanent waiver and/or standstill to prevent them taking any adverse action
    • even if facilities have not and are not likely to be breached imminently, is the company required to make any material payments (of principal, interest or otherwise) to lenders in the short term?
      • consider your relationship with lenders and whether it would be viable/helpful to seek a deferral of interest or scheduled repayments for a period
  • seek to reduce your net working capital:
    • review creditor position:
      • within how many days must the company make payment to each creditor - are you making payments earlier than required? Consider stretching creditors and increasing creditor days by making later payment
      • consider seeking extension of credit terms (amount and period) or a payment holiday if appropriate, though this may not be viable if creditors are aware of and have concerns about the company's position
      • consider market perception and ensure messaging is appropriate. Make sure you do not jeopardise any key contractual relationships that you will need to maintain in order to survive. See Other matters to bear in mind
  • review debtor position:
    • consider scope for reducing debtor days by tightening credit terms offered to customers/counterparties or otherwise incentivising early payment
    • review bad debts and reduce exposure to those counterparties. Consider the appointment of debt collection firms to improve recoveries
    • consider factoring debts - see Potential financing solutions
  • review production efficiency and inventory management to maximise efficiency and control spending/wastage
  • review non-essential spending:
    • consider cancelling or deferring planned spend on capex, projects or acquisitions
    • consider short-term cashflow gain versus longer-term benefit/detriment (there is likely to be a more compelling case to preserve spending on maintenance capex than growth capex)
    • are you contractually committed to any such spending? Consider ability to terminate arrangements
  • focus on cash and cost management:
    • identify amounts and location of cash (or liquid assets) held
    • consider any group cash-pooling arrangements - where might cash be held and used optimally within the group and are existing arrangements appropriate?
    • consider implementing tighter cost controls - increase scrutiny of outgoings and review whether costs can be eliminated or reduced
    • review "trapped crash" within the group (if relevant) and consider whether measures could be taken to realise it