Meeting The Current Credit Crunch Head On .... 5 ways to do it

Why businesses must plan cash, not profit to tide over
current liquidity crisis … and 5 ways they can do it!

The way to tide over the current liquidity crisis for businesses is to
take it head on, letting it happen to them is risky.

Anupam Jaiswal (Contact: anupamj74@gmail.com )

SUMMARY
IMPACT OF THE LIQUIDITY CRISIS ON BUSINESSES AND
HOW SMART ONES WILL TACKLE IT SUCCESSFULLY

Current Crisis 101: what is it?
The current liquidity crisis has been caused / affected by several
large crashes in many businesses / international stock markets
caused by a worldwide lack of liquidity or credit crunch.
Experts attribute the reasons for the series of events including
the subprime mortgage crisis, failure of key financial institutions
and the energy crisis.
Financial institutions which had engaged in the backing of
mortgages such as Bear Stearns fell prey. On July 11, 2008, the
largest mortgage lender in the US collapsed. IndyMac Bank's
assets were seized by federal regulators after the mortgage
lender succumbed to the pressures of tighter credit, tumbling

home prices and rising foreclosures. That day the financial
markets plunged as investors tried to gauge whether the
government would attempt to save mortgage lenders Fannie
Mae and Freddie Mac.


The crisis further accelerated in late summer following the
placement of Fannie Mae and Freddie Mac into feds hands. It
then began to affect the general availability of credit to even
non-housing related businesses and to larger financial
institutions not directly connected with mortgage lending. At the
heart of many of these institution's portfolios were investments
whose assets had been derived from packaged home mortgages.
Exposure to these mortgage-backed securities, or to the credit
derivatives used to insure them against failure, threatened an
increasing number of firms such as Lehman Brothers, AIG,
Merrill Lynch, and HBOS. Other firms that came under pressure
included Washington Mutual (the largest savings and loan in the
US), and last of big investment firms, Morgan Stanley and
Goldman Sachs.
While there will be zillions of studies on how and why it
happened, this paper aims to investigate that this being a fact of

life now, what it will mean for businesses and how they can be
better prepared to meet the challenges thrown by the crisis.


IMPACT ON THE BUSINESSES:
This liquidity crisis is coming at a time when businesses are
facing two other major crises: US economic slowdown, which is


depressing the demand and higher energy costs, increasing the
costs. Even without the liquidity crisis, these two factors were
directly impacting certain industries like transportation, airlines,
auto, hospitality etc and other sectors like Consumer Products /
Retail, High Tech and Services etc indirectly.
The impact of all the 3 factors working in unison, has a potential
for creating economic conditions that puts at risk several
industries, as well as individual businesses, even the ones with a
sound economic basis. Businesses going through usual
downturns / seasonal fluctuations, which would once have
survived by extending their credit facilities, may now be pushed
into liquidation. This is especially true for medium sized
companies that tend to consume cash faster in short term.
Statistically, even in normal economic conditions, more
companies are liable to go down because of cash flow / liquidity
issues and credit crises, than other factors. The current economic

climate will accelerate the impact of the 3rd factor on the
businesses to an even greater extent.
While this will certainly lead to realignment of the business
landscape in many industries, with many organizations
consolidating into their bigger counterparts or even going under,
the ones that have most probability of tiding over it are the ones
who can optimize their key operations, in time and in tune with
the market conditions.
While most businesses admittedly will have limited control over
the first 2 economic drivers (economic slowdown and energy
costs), there is surprisingly a substantial scope for optimization
to counter the 3rd driving force, ie, liquidity crisis.
We will demonstrate through a series of steps, how businesses
can look at their cashflows from a different perspective and
optimize it to gain competitive advantage by aligning their
processes, people and tools.

Approach
The purpose of this document is
to demonstrate why it is a
necessity businesses to review
their financial supply chain, gain
insight into financial supply chain
hot spots and also, how those hot
spots can be resolved leveraging
existing tools within the
enterprises, while at the same time
freeing their key people from
logistical activities so that they
can focus on more strategic tasks
at hand.


This approach is based on looking at the cashlfow cycle as a
loosely coupled, yet integrated supply chain spanning across
organizations / financial institutions, rather than as a disjointed
series of steps in isolation. Treating the cash as a commodity
which flows through a similar supply chain as say, your office
supplies, enables the business to have an improved visibility and
control into the overall process, providing insight which is
actionable and timely.
Businesses already know of scenarios when they know that a
certain commodity is going to become costlier in near term
future and they take steps to optimize the full utilization of the
commodity thru their value chain. One of example is
FuelSmAArt initiative by AA, which was in response to rising
fuel costs for the airlines and which has resulted in millions of
dollars in savings.


Now consider this. In case of “cash flow” as a commodity, most
of the major suppliers of this (ie, banks and lending institutions)
are cutting the supply, which will make it at least costlier if not
unaffordable for lot of businesses. The response of smart
businesses? Optimize the supply chain cycle of this commodity,
so that it is forecasted, procured, used and distributed as
efficiently as feasible.


Cashflow 101:
In simple terms, the financial supply chain for businesses is:
• Get money from investors / banks
• Pay to employees / vendors
• Receive from customers
• Pay to investors / banks
A more definitive picture is:


Key projections for the near term business cash flow dynamics
are:
1. Tighter credit borrowing, at increased costs
2. Pressure on demand by customers, at lower margins /
longer credit cycles (with increased probability of non
payments / bankruptcy)
3. Pressure from vendors for faster payments (maybe
driven by cash incentives for faster payments)
4. Fluctuating energy costs
5. Increased scrutiny from banks / lenders / investors on
the cashflow data, with higher frequency
6. At least in certain industries, currency pressures and
US economic conditions will induce pressures for export
lead growth, driving more complexity in management of
treasury, forex, payment methods and bank settlement


7. Reduced workforce for supporting functions, with
increased human focus on strategic tasks rather than
routine activities

In next few sections, we will review each step of this cycle and
will identify the key hotspots and business actions, which can
optimize the cycle. These actions will be suggested keeping in
mind the above mentioned market factors. The goals will be
• Improved insight providing actionable intelligence into
financial processes
• Better predictability of cash flow
• Reduction of working capital
• Reduction of operating expenses related to financial
supply chain


Following are the key steps in cashflow cycle which will be
examined for optimization and tools / best practices will be
suggested for improvements.

• Credit management: controlling customer’s credit
exposure, optimizing terms with the customers and by
reducing the amount of bad or doubtful debt.
• Cross enterprise Invoice Processing platform : Customer /
vendor self service for your invoices (AR and AP)
• Liquidity management : Managing cash positions by
combining bank account balances, forecasted cash
collections & payments, sales & procurement
information.
• Treasury: Forecast of liquidity positions will enable
treasurery actions to manage cash shortage or surplus,
cover currency and interest rate risk. The treasury

component will support them through a wide range of
available financial transactions, the generation of deal
confirmation, payment files & accounting entries.
• Disputes Management: Reduce DSO and increase
customer profitability by proactive identification of
issues and disputes in the payment cycle, tracking &
monitoring reasons that drive DSO and by streamlining
the dispute resolution.
• In house cash: Of specific interest to multi country /
currency operations, this is meant to support
multinationals in management their cash collection and
payments from limited number of locations on behalf of
their affiliates. Consequently, multinationals will reduce
their number of existing bank accounts & streamline their
payment processes.


• Collections: Proactive management of AR to evaluate,
identify and prioritize accounts, collect and collaborate
with external and internal business partners.


Meeting The Current Credit Crunch Head On .... 5 ways to do it

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