Juggling Liquidity

During the very complicated period that we currently need to manage, liquidity is a common concern. We shouldn’t care only about the here and now; we should also focus on the medium and long term. This is why liquidity is and will be one of the most nagging headaches afflicting corporate bosses. Treasury tensions are almost always caused by the search for financing; a search that clashes with reluctance on the part of traditional financiers which, except with the support of government guarantees, are not keen to compromise and take on new risks.

We are, however, facing a crisis that is very different from others. The market has been flooded with liquidity due to that government support. The reality is that huge amounts of liquidity have entered the system since mid-2020. Additionally, non-traditional funding players have entered the market showing a willingness to inject cash, but at a price, that is higher than what is offered by banks and through public financing.

These alternative sources are patiently waiting for their market moment. This moment will possibly come when liquidity is still needed and the flow of government support has dried up, since traditional banks are not expected to be in a position to increase their risk – and corporates will find it necessary to resort to them.

If we look at what happened during 2020 and 2021, we can see that government support has fulfilled its mission reasonably well, which was to cover the lack of cash caused by the pandemic. This situation is now being aggravated by this second geopolitical crisis – Russia’s invasion of Ukraine – that emerged during the first quarter of this year.

Companies have been able to stay afloat despite increasing their indebtedness. Staying solvent, operating in the rump of the pandemic and gearing up for the ‘new normal’ has been possible thanks to the safeguarding of working capital lines protected by legislative measures. The impact, therefore, has not been dramatic in short-term liquidity. But it has introduced a level of over-indebtedness or, to be clear of indebtedness that is difficult to sustain, which forces us to do our homework and take corrective measures.

The correct management of this situation would be to assume that the liquidity we have available must enable us to tackle three challenges:

• Convincing traditional and non-traditional funders that the grassroots business has not been damaged and deserves the same trust it enjoyed before the health crisis.
  
  
• Create within the organisation a cash-generation mentality. More than ever ‘cash is king’. The reason for this is not that we have to face a lack of liquidity in the short term, but the need to generate an excess of liquidity that, over time, enables us not only to develop our business plans but also to save the funds needed to cope with our over-indebtedness.
  
  
• Finally, we do not tire of saying that crises force us to apply intelligence and look for solutions that will improve corporate operations. It's time to analyse our average collection and payment periods, to consider these aspects as key during negotiations with customers and suppliers and to optimise the use of the financial instruments we have so that our payment flow is sustainable and financed by our collections.

Jawaharlal Nehru, the Indian politician, secular humanist, and post-independence Prime Minister for a total of 17 years, said: “Crises and deadlocks when they occur have at least this advantage, that they force us to think.” And this is true. To be able to emerge from a crisis and have the resources to cope with the impacts on our business caused by this new geopolitical storm, we are forced to ‘squeeze’ our own resources.

There is no more adequate source of financing than that generated by our own activity, using each euro in the right way. And employing resources to enable us to know when we will have it is key.. This is about having a firm handle on all aspects of the business. We have to be able to measure the impact of increases in energy prices and the knock-on effects of logistical problems. We should be realistic about our liquidity forecasts and ensure we have a getting a clear picture of the business’ needs. It is also about not forgetting that any debt must be paid and that financial creditors have the ‘bad habit’ of wanting to see their positions taken care of! We are not in a subsidised world in which the liquidity borrowed does not have to be repaid, but in a world in which assuming the obligations and foreseeing the future needs and the possible setbacks that can assault us becomes key.

We all agree that the invasion of Ukraine has come at a particularly delicate time for the majority of businesses globally. We were already contemplating the return to the ‘new normal’ and were aware of the need to manage the consequent high indebtedness, tackle challenges linked to the cost of energy and raw materials, and subsequent breaks in supply chains. We were – and still are – anticipating how future debt maturities will be faced, how to foster growth and how to employ Next Generation EU (NGEU) funds to ensure that robust and sustainable growth occurs. We also find ourselves facing another need: the need to be short-termist and ensure that our activity does not cease or falter due to lack of cash as a direct result of the collateral impacts of the new crisis in Ukraine.

Under normal conditions, treasury strains are a symptom, like a fever, they are an indicator that signals that ‘something’ is not working properly. That ‘something’ can be due to a lack of profitability, pressures to meet the debt burden, mismatches between the collection and payment terms or, as we are facing now, all of the above. All of those issues plus the extraordinary post-pandemic factors and those that afflict us due to the conflict in Ukraine. Therefore, the ‘indicator that something is wrong’ character of treasury is lost when we are in extraordinary situations such as these. The problems may not be entirely attributable to the business. We can lower the fever with cold water, but we cannot suppress it without controlling the source of the infection, as we saw with the Covid-19 pandemic. Let's not forget that if the medication translates into new debt, we will again have to foresee how to repay it and try to improve our EBIDAs [earnings before interest, depreciation and amortisation] or be more efficient in the management of liquidity by improving working capital with more accurate forecasts and/or more appropriate working capital instruments.

It is also relevant to note that treasury challenges affect SMEs more drastically than large companies, given that SMEs tend to have a weaker financing structure. Statistically, mainly in Latin countries, a huge percentage of SMEs that have to close do so due to treasury tensions. The statistics, which are already worrying, may not be so relevant to the two crises we have experienced because, as we have pointed out, government sources of funding have been activated to mitigate the effect. But the moment the funding tap is turned off and the dripping of the maturities begins, the financing issues will return, and this percentage will be even more significant.

Let me offer you a snapshot of the business landscape in Spain. SMEs make up more than 60% of the Spanish economy and account for 75% of employment. The comparative figures are similar in Portugal and Ireland and even higher in Italy.

It is clear that the first golden rule is that not only do we have to look for short-term solutions to secure our treasury in particular and the business in general, but it is essential to have a long-term vision. This will go some way towards protecting the business against further adverse conditions at a time when unexpected problems are an everyday occurrence. A contingency plan that enables treasury to tackle the inconveniences in such a way that they never jeopardise the future of the business.

In conclusion, it is clear that there are many factors impacting the efficient management of the treasury department today. It is almost a juggling act and being successful is now far more complex than it used to be. However, we have to be realistic and practical. Let's identify the areas of the business that depend upon us, execute our jobs well, and go that step further and be excellent at it.

Creating a solid, structured, and quality internal information scheme, both in anticipating what is to come and in explaining the finer points with respect to what is planned, should be considered obligatory practice for a responsible treasurer.

Allow me to quote the 16th century French poet Pierre de Ronsard: “He who knows himself is his own master." Let's work internally and externally and let's be clear in our belief that cash management is always key. And even more so during these challenging times.

José Carlos Cuevas
Partner at EY-Parthenon Strategy and Transactions
Chair of the Treasury Commission at ASSET
Member of the Board at European Association of Corporate Treasurers (EACT)
Member of the Board at International Group of Treasury Associations (IGTA)
Member of the Oversight Committee at EMMI (European Money Markets Institute)