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14
Oct
2010
Liquidity from inside in distress time

Cash is vital. Cash is the key. Cash is the king. Cash is everything in finance. I know it is hard to absorb but end of the day it is cash that matters. It is nothing but cash that is the index of value. Accrual basis of accounting can say whatever but once we are going to value the company we need to know the free cash flows of the company.

 

Aggressive marketing, fantastic ideas and growth prospects; if they are not communicating cash so they all are baseless. In today’s age when acquiring cash from markets is not that an easy call, the importance of internal liquidity management is vital.

 

ADVICE FOR THE CLIENTS IN FINANCIAL CRISES

Tim Coleman a well known restructuring advisor said that it is the self help time. Our advice to our clients right now is, ‘You have to have liquidity’, you have to have cash, and don't kid yourself. This statement is the reflection of the need of finding smart cash solutions by crafting efficiency in operations that can help companies to save cash that can be utilized in distressed business scenarios or times.

 

In the absence of credits in the market internal liquidity management plays a vital role to sustain business ops. Many companies in current scenario are considering their dividend calls. There are many who think that they have to cut down the cost on research. There are many who want to lay off their workers. All is directing towards once concept to manage internal liquidity.

 

A FINANCIAL PSYCHOLOGICAL DISORDER

I think the companies across the world have psychological disorder connected to financial management. They always think of internal liquidity in the time of distress and crises. The way they act or react in brisk times is really unprofessional. The habit of internal liquidity management is required in ordinary course of business that benefits in distressed times.

 

Liquidity is always a critical issue. It is the only evidence that make continued operation and the concept of going concern viable. A distressed in liquidity concern can be seen as an end myth in the market.

 

LIQUIDITY RISK IS CONSEQUENTIAL

Sometimes we take liquidity problem as a core of problems. Actually it is not! The most important point is liquidity risk is more a derivative. It is derived from the failure of operations or the chances of failure. So generally it appears because of other inefficiencies. This is why the risk of liquidity is sometimes termed as consequential risk. The case is more firm in term of internal liquidity management. It is purely related to operational efficiency and management. The role of financial management is critical but the role of financial communication is highly vital.

 

In order to enhance internal liquidity management the concept of financial intelligence has to be taken care off. All strategic business units of the company (whether they are financially educated of not) need to be trained on the meaning of numbers. They need to develop a financial intelligence that can guide them once they are going to plan any operational wonder that can cultivate financial chaos.

 

FORECASTING & REINVESTMENT IS THE KEY

Liquidity planning is the most important aspect. Companies need to forecast their cash needs. They need to find smart and cheap cash solutions to finance those needs. They need to develop a framework that facilitates excess cash to have an auto reinvestment function. This shall multiply the cash and reduce her negative holding effects. This is also inducing the need of risk management framework for liquidity. The reinvestment need to be addressed in comparison of parking cash in company’s treasury and multiplying it via reinvestment channels. They liquidity of those investments is also a point that need to be worked.

 

In distress times cash plays a vital role. Even as per the psychology of the market cash become a true exchange in the time of crises. As Kay Lyons said that Yesterday is a canceled check; tomorrow is a promissory note; today is the only cash you have - so spend it wisely. So today is the cash’s age. It is highly recommended to manage cash inside once the opportunity of getting or making cash from outside are low.

 

CORPORATIONS OR INDIVIDUALS CASH SHARE SOME IDENTICAL INSTINCTS  

Even it is not only companies that have to care cash in distress times but it is well applicable on individuals. Sophie Tucker said that from birth to age 18, a girl needs good parents, from 18 to 35 she needs good looks, from 35 to 55 she needs a good personality, and from 55 on she needs cash. I think it is all about corporations that can decide when they are going to reach their 55. Even they can reach 55 in 5 years. It is market that makes things too fast. But one thing they have to know for sure is that they can’t get cash after 55 rather they have to have it. They have all their chances to earn or save that cash from birth to 55.

 

WHAT COMPANIES DO HAVE TO FOCUS?

It is actually information that reveals the grey areas in internal liquidity management. I think companies across the world need to develop a sophisticated management information system that shall pop up the areas where the operational processes can be performed by incurring lower cost that it has been already incurring. The role of information system is essential to understand cost and revenue behaviors that can help management decide from where they can save and from where they can earn.

 

It is a high time when the understanding of internal liquidity management needs to be focused. It is not necessary that we start thinking about it once the crises arrived rather we have to make it a routine practice. It is highly essential to generate cash from the operations by working the operations efficiently. Generally the things that we think in the time of distress are those that if we thought it in good times so the crises could never be arrived.


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Mr. Omer

Mr. Omer [1982 born] started  his professional career as a commercial / investment banker after achieving Gold Medal in Finance at master level from University of Karachi in 2006.

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