TOOL 5.3
Confirm Your Perception of the Stage in the Cash Crisis (See Separate Tool)
- What is the gap between immediate cash inflows and needs? (including debt service)
- Can the gap be easily funded?
- Does the Bank have or wish to control these immediate cash inflows and outgoings?
Short Term Strategies
Whatever the stage in the cash crisis the following strategies should be in place:
- Strong central financial control
- Cost reduction
- Tight working capital management
- Deferral of non-essential expenditure
- Sale of non-core assets (depending on market conditions)
If these are not in place then the ability of management to stabilise and improve the risk profile of the business must be seriously questioned.
The client may also adopt the strategy of drawing down uncommitted lines to buy time. How this affects our exposure will influence our view.
Long Term Strategies
The amount of immediate focus on these issues will depend on:
- The current stage in the cash crisis.
- Successful implementation of the above strategies.
The range of options chosen from those outlined below will be determined by:
- Causes of the client’s current problems.
- The business’s historic strategy. Should it be continued, changed, or reversed?
- Industry cycle.
- Flexibility of the company’s cost /price structure.
| Change of management | – How much are management responsible? – Do they have the ability, integrity, commitment to solve the problem they managed? |
| Organisational change and decentralisation | – Works well in large diversified businesses and where there is a large, ineffective central function. – Can add an unnecessary distraction from the core problems. |
| Product / market reorientation | – Essential where margin and operational cash flow improvements are required. – May involve high market risk. |
| Improved marketing | – Applicable where product is strong and price inelastic. – Marketing risk and control of cost are a problem. |
| Asset reduction | – Difficult to achieve at the bottom of the cycle. – Capacity has to be cut below cash break-even |
| Debt rescheduling | – Only relevant if future debt service capacity likely to be in place. – Beware that you are not simply postponing the problem. |
| Growth via acquisition | Relevant for good management who need to achieve economies of scale. |
| Investment | – Essential for cost leadership and maintaining good parts of the business. – Make sure it does not make the risk profile decline further. |
