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Friday, October 17, 2008

Credit is tight Manage Your Capital

Much of what we are hearing in the press about the financial markets is beginning to spread beyond the finance industry. The cost of money (capital) has gotten very expensive and many capital providers are no longer issuing credit. Therefore as organization leaders, we should begin the process of capital preservation to manage through the economic downturn.

Maximizing profit is not your top priority in this environment, as this crisis continues there will be a negative impact to the overall economy and at this time, we should have a plan to address the worse case scenario. How quickly a business can ratchet down for the impending economic storm will be the difference between long-term survival or near term failure.

I have been talking with my colleagues and the common recommendation is a two-step plan to addressing an organization’s current capital position: Assess your current funding and then build your cash position

Assess Your Current Funding
Assessing the current funding is really looking at time, covenants, and lenders. The first, Can your organization survive on the funding from normal cash generating businesses or do you need regular working capital to manage the collections cycle? If you accelerate payment collection and receive no additional working capital infusions, can the organization remain solvent? Shorten credit terms with clients. For new business, ask for larger upfront payments. Second, ensure that these conservation activities will not place the organization at risk of a margin call and ask lenders with restrictive covenants for changes. Regularly check the status of the more difficult covenants working out limitations before they become an issue. Finally look at each lender, determine their viability in the marketplace. The lending community is rapidly adjusting its policies and target market daily therefore, many may no longer lend in the same business segments as before. To protect your organization, add credit lines with new working capital providers. Then, regularly talk to the lending community to gain insight into the availability of these funds. Applying these simple solutions will enable an organization to protect access to funding sources.

Build Your Cash Position
Cash is king and that means draw down your credit lines, delay payments, and control costs. After assessing funding it is time to draw on the credit lines and place the cash into your various bank accounts (be certain your bank is not at risk of failure). Remember the motto; “banks lend to those who do not need it”. Therefore, it is better to get the cash now. Second, review vendor payment terms and renegotiate; just like your bank loan covenants, tracking vendor payment terms will avoid issues later and contribute to the long-term reputation of your organization. Finally, and this is the most painful, start looking at your spending. There is significant overcapacity in the marketplace for almost all goods and services. Focus on the three most costly areas first: put expansion plans on hold, stop hiring, and reduce travel to “essential only”. These steps will allow you to stay liquid for longer period.

Recessions are part of the normal business cycle and the marketplace will have to work through the current overcapacity before a recovery can begin. Strategies for maximizing profit or market share can prove costly in this environment. However, a capable organization with proper working capital management and cost controls can come out the other side of this cycle positioned to take advantage of the next expansion.

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