Helping the CEO to Sleep Soundly at Night
by Nigel Grey, Chairman, ACTSA
As the treasurer of your organisation how confident are you about its ability to survive and thrive? And how confident are you about its ability to survive a material unexpected business disruption event? By disruption event I am referring to an event that the business had not anticipated in its normal business planning.
We have all heard the phrase ‘Cash is King’ from time to time, usually after some business has got into some form of financial trouble. But surely it does not apply to your organisation, considering your business model, market position, product offering etc. Whatever could go wrong?
Ever had those thoughts? Ever known someone with those thoughts? Ever done something proactive to prevent such an event having a disastrous impact on your business?
When I was starting my treasury career, I learnt two important lessons from one of the CFOs I was fortunate to work with. The first was never say ‘NEVER’ and the second was that nothing is impossible. Of course those words and sayings can be taken either positively or negatively.
It is hard to believe that major businesses could and do go out of business even when times are good and they are being well managed. Regrettably, the impact of a negative unexpected business event may damage the company so badly that it never recovers. The reason for such failures is because the company simply runs out of money before it has been able to react to the situation it is facing. For example, take the case of the American energy firm Enron which during the 1990s, through the use of accounting loopholes, special purpose entities and poor financial reporting, was able to hide billions of dollars in debt from failed deals and projects . It all went horribly wrong in 2001 when it filed for bankruptcy. At USD 63bn in assets it was the biggest corporate failure in US history until Worldcom went bankrupt the following year.
The Enron story is well documented and in essence, whilst the management knew just what game they were playing, the real losers from the Enron scandal were its auditors, Arthur Andersen. The fallout caused a massive loss of confidence which resulted in their customer base evaporating and the business eventually closing – in essence they ran out of cash before they could rebuild their business and restore confidence. Matters that can rapidly change a business’s liquidity are often not foreseen. It is highly unlikely that the senior managers at Arthur Andersen knew what they were exposed to until they were in the thick of it fighting a rearguard battle.
Act before it’s too late
Trying to secure liquidity funding after a major negative disruption event is too late. Ever known a financier who wants to provide finance when the perception of the business’s credit quality has taken a knock? I reiterate, by then it’s too late! Recent examples of disasters which have affected businesses through no fault of their own are the tsunami in Japan, the volcanic eruption in Iceland which disrupted air travel and severely impacted Kenyan flower producers, the downing of the Air Malaysia jet over Ukraine just months after the airline lost an aircraft en route to China and the labour strikes in the South African platinum belt that dragged on for five months, impacting not only the mining sector but the many support industries in the Rustenburg area.
In today’s world, product cycles are shorter, the competitors who may make your products and services (and perhaps you yourself) obsolete may not even be in existence now, but could impact your business within years.
In the past two decades it has been the development of the internet, personal computers, mobile phones, tablets, and related automation which have made many products and processes obsolete. The development of electronic sensors is improving production processes and even moving into autonomous vehicle automation. These products are affecting consumer preferences which can and do change rapidly depending on the latest development. In the modern electronic and App era it seems as if the pace of change is becoming ever faster.
This means that having a liquidity buffer is becoming more and more of a necessity for businesses rather than just a ‘nice to have’. Having access to a considered amount of liquidity, especially when the business is experiencing a financially stressful period, is becoming harder to secure as the assessment of credit risk by financial institutions becomes more sophisticated and increased regulatory costs make the cost of finance expensive.
Focus on cash management
Determining a level of liquidity is based on many factors. Cash management is probably more important today than it was in decades past, yet in today’s frenetic pace of business I often get the impression that many people merely give the concept of cash management occasional lip service. I was recently involved with a business which went through a period of business rescue. The business recovered and a positive consequence of this process was an extremely high focus on cash management. This focus on cash management is one of the reasons the business has extremely low levels of debt today.