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Cash, the lifeblood of business


Many companies, especially medium-sized and small ones, all too often forget the importance of maintaining a good treasury and enough liquidities. In fact, a company can make ten years of book losses without going bankrupt. On the other hand, if it cannot meet its obligations, it goes bankrupt through cessation of payments. There are even profitable companies that disappear for lack of liquidity. Access to liquidity is therefore the sinews of war. That's why we need to preserve and secure it. And by the same token, company size is no excuse for not managing treasury with care. What are the rules to follow for a company, and even more so if it's a small one? 

Cessation of payment, cause of bankruptcy 

We often forget that a company can easily survive accounting losses (provided it has sufficient equity). On the other hand, if a company is unable to meet its obligations at a given point in time, due to a lack of liquidity, it will go bankrupt immediately. Stoppage of payment is therefore vital and fatal. To avoid it, you need to ensure and protect yourself in every possible way against any liquidity risk (e.g., with back-up lines of credit, with an invested cash reserve, with optimal and dynamic management of working capital requirements, with sufficient or increased capital, etc.). And when you have liquid assets (or what we call “cash equivalent”), you need to optimize their management, to increase yield and to place them in short-term positions so that they can be rapidly mobilized and accessed. Liquidity only makes sense if it is accessible. Indeed, if a company has holdings or subsidiaries, even if they are controlled or consolidated, and cannot access their cash, it cannot be considered as "accessible" and usable cash. To avoid this situation, you need to be prudent and manage your cash flow, even if you don't have a treasurer. Excess liquidity does not necessarily have to be distributed, and having a reserve or cushion to absorb extreme situations is good practice. Similarly, it is advisable not to maximize leverage by taking on too much debt. Too often, SMEs are undercapitalized and overleveraged. 

Confirmed lines of credit 

The second piece of advice is to negotiate a “committed" back-up credit line to act as a safety net in the event of financial problems. Think of COVID, a sharp rise in the price of raw materials, a delay in the delivery of materials, a war, etc. Opportunities abound, and risk management recommends taking out insurance by setting up an unused but usable line of credit in case of need. The art lies in properly defining the size of the lines to be set up (too small and they create liquidity risks, and too large and they cost too much and pose risks). 

Consolidation, the "must-have 

Consolidation is often avoided by medium-sized companies, out of a concern to cut costs, "bury the fish", hide certain things from their stakeholders, etc. Admittedly, it is a costly and time-consuming exercise, but necessary and ultimately compulsory to enable the bank to measure risks and protect itself by granting credit to the umbrella company and avoiding "structural subordination", fatal to large, over-decentralized groups. Consolidation is the bane of SMEs, and that they fear it even though it provides clarity, visibility and transparency. A company with nothing to hide won't refuse to consolidate its accounts. There have been too many cases of fraud in recent times for consolidation and auditing to be imposed. 

The banking relationship: a risk to be managed 

We can only advise you to dynamically "manage" your relationship with your bankers, and not to do so passively or only when you need to. You don't develop a relationship when you need it, but when you don't, so you're ready when you do or would need it. It's a risk: the risk of losing your banker or not finding one, and to mitigate it, you must manage the relationship by investing in developing it and providing support if and when it's needed. This is why you need to avoid using too many banks or, conversely, having too few and becoming too dependent on them. The banker's profitability will sustain the relationship. It's important to keep this in mind, and to distribute your operations fairly. 

Anticipating future flow forecasts, a preventive tool 

"Gouverning, it is predicting; and not anticipating, it is running at its loss" (Emile de Girardin - La politique universelle / 1852 ). We could also say that to manage is to foresee, and to foresee nothing is to run to financial ruin. Here again, the small business doesn't see future cash-flow forecasting as a solution, a tool, an insurance policy, rather than a cumbersome, imperfect, useless or costly task. Of course, it's complicated and time-consuming to set up, but it's vital if we are to survive and anticipate future needs.   


“Working” liquidities 

It is interesting to invest excess liquidities to maximize returns. Money can't sleep, it must remain liquid, but we must extract the maximum yield. Here again, we see too many SMEs letting their money "sleep" in their bank accounts. This only makes their banker happy. On the other hand, it is essential to have cash "invested" in the short term (so that it remains liquid and can be mobilized quickly - the very essence of the word "liquid"). You'll be able to extract a return on your cash while keeping it "available". Liquidity is the blood or oxygen that enables you to adapt and satisfy cash requirements to pay off debts and keep pace with the seasonal nature of your operations. Working capital can also be managed and optimized. Liquidity doesn't just come from shareholder capital, credit lines or excess cash. It also comes from optimized management of working capital. 


Outsourcing, the panacea 

Too often, the CFO will claim that he/she doesn't have the resources or the treasury expertise in-house. Admittedly, this is the case for many companies. We can advise them to appoint someone who will be responsible for all or part of this task, and train or coach them. Treasury management can also be outsourced via a Treasury as a Service (TaaS) solution, which offers tools and ad hoc personnel. The "it's not affordable" excuse is no longer an option, these days. 

Survive a hemorrhage and die for lack of oxygen! 

A company "could survive a reasonable hemorrhage (i.e., accounting losses) and perish from a two-minute lack of oxygen (i.e., lack of liquidity). There are all too many cases of companies that are described as "profitable" but perish for lack of cash. This is the case of companies that grow too fast. A company's survival depends not only on its ability to sell its products and services, but also to satisfy its creditors and pay off its debts to avoid bankruptcy.   



François Masquelier, CEO of Simply Treasury – Luxembourg August 2023 

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