How to manage company liquidity

Busi­ness­es have faced many chal­lenges over financ­ing in recent years. The finan­cial cri­sis of 2008 had a pro­found effect on the glob­al econ­o­my and saw the intro­duc­tion of a raft of new reg­u­la­tions aimed at pre­vent­ing fur­ther crises.

Greater restric­tions on bank lend­ing prac­tices have made fund­ing for all busi­ness­es more chal­leng­ing and recent mar­ket volatil­i­ty has exac­er­bat­ed the sit­u­a­tion.

As financ­ing issues have become more nuanced, the role of the cor­po­rate trea­sur­er has been in greater demand among many busi­ness­es.

“Since the reces­sion of 2008, we’ve seen a rise in the demand for trea­sury roles, par­tic­u­lar­ly as com­pa­nies have been pay­ing greater atten­tion to their bal­ance sheets,” says Nigel Peters, man­ag­ing part­ner at glob­al inter­im man­age­ment ser­vices firm Ali­um Part­ners.

“Trea­sury and cor­po­rate finance is a very niche area and we’ve seen more call for that capa­bil­i­ty, par­tic­u­lar­ly now with much high­er cash lev­els on bal­ance sheets, or pres­sures cre­at­ed by the state of the econ­o­my or increased reg­u­la­tion.”

Regulations impacting lending

New reg­u­la­to­ry chal­lenges have made life tougher for both banks and bor­row­ers. The imple­men­ta­tion of the Basel II inter­na­tion­al bank­ing reg­u­la­to­ry accord  has had a pro­found impact on banks’ abil­i­ty to lend, as it includ­ed a num­ber of con­di­tions regard­ing the set­ting aside of cap­i­tal.

The impact of the reg­u­la­tion has been wide­ly felt, with gov­ern­ments around the world tak­ing mea­sures to shore up the bank­ing sys­tem through quan­ti­ta­tive eas­ing mea­sures. But bank risk appetite has been slow to return since the finan­cial cri­sis.

Larg­er com­pa­nies have been able to weath­er the chang­ing con­di­tions, with access to cheap­er sources of finance than small­er busi­ness­es.

“Big cor­po­rates with invest­ment-grade rat­ings haven’t had lots of dif­fi­cul­ties to raise financ­ing,” says Yann Umbricht, part­ner and UK trea­sury leader at con­sul­tan­cy PwC. “It’s real­ly easy, [com­pa­nies] are bor­row­ing for longer and cheap­er than they ever did before. In Euro­pean mar­kets, cor­po­rates are bor­row­ing at neg­a­tive rates.

“Bank financ­ing is a lit­tle bit trick­i­er because of the reg­u­la­tion and there are so many cap­i­tal require­ments.

“For larg­er com­pa­nies it is eas­i­er because banks are more like­ly to lend if you have a good rat­ing and it doesn’t cost you too much cap­i­tal. If you’re a riski­er asset, it becomes more dif­fi­cult because the bank will need a greater return and it will be expen­sive.”

Yet lenders report­ed a sig­nif­i­cant decrease in demand for cor­po­rate lend­ing from all com­pa­nies, accord­ing to the Bank of England’s third quar­ter Cred­it Con­di­tions Sur­vey. There was a sig­nif­i­cant increase in demand for unse­cured lend­ing from small busi­ness­es expect­ed dur­ing the fourth quar­ter of 2016, how­ev­er.

While the risk of invest­ing or lend­ing to small­er com­pa­nies can be greater than well-estab­lished, larg­er com­pa­nies, the sur­vey not­ed that default rates for small busi­ness­es have con­tin­ued to decrease over the past two years.

Alternative finance options

Despite bank reluc­tance to lend there are a num­ber of financ­ing options avail­able to cor­po­rate trea­sur­ers and chief finan­cial offi­cers in the cur­rent cli­mate. Inter­est in more estab­lished alter­na­tives to tra­di­tion­al lend­ing, such as invoice financ­ing, has surged.

Accord­ing to the Asset Based Finance Asso­ci­a­tion (ABFA), the total amount of lend­ing secured through invoice finance hit £20.3 bil­lion in 2015–16, a record high. The UK and Ire­land indus­try body for asset based lend­ing and invoice financ­ing, report­ed a 5 per cent increase on the pre­vi­ous finan­cial year. The surge was dri­ven by an 18 per cent increase in the amount drawn down by busi­ness­es with a turnover of more than £100 mil­lion.

“While the avail­abil­i­ty of finance from tra­di­tion­al sources was rel­a­tive­ly slow to recov­er from the cred­it crunch, the asset based finance mar­ket opened its doors to busi­ness­es and there remains sig­nif­i­cant capac­i­ty to pro­vide more finance to more UK busi­ness­es,” says ABFA chief exec­u­tive Jeff Longhurst.

Alter­na­tive forms of financ­ing have also grown in pop­u­lar­i­ty. With busi­ness­es turn­ing to new and emerg­ing sources of finance to meet their liq­uid­i­ty require­ments. In a report pub­lished by inde­pen­dent inno­va­tion char­i­ty Nes­ta, in part­ner­ship with con­sul­tan­cy KPMG, £2.2 bil­lion was raised in alter­na­tive finance dur­ing 2015, ben­e­fit­ing 20,000 small and medi­um-sized enter­pris­es (SMEs).

Peer-to-peer lend­ing has also seen an increased num­ber of busi­ness cus­tomers tak­ing out loans. Data from the Peer-to-Peer Finance Asso­ci­a­tion (P2PFA) showed there were 24,394 busi­ness bor­row­ers at the end of June, up from 7,291 dur­ing the third quar­ter of 2014 when the trade body began col­lect­ing lend­ing infor­ma­tion.

Indeed, £405.5 mil­lion in new busi­ness lend­ing was made dur­ing the sec­ond quar­ter of the year by P2PFA mem­bers, some of the biggest names in the sec­tor. Cumu­la­tive lend­ing to busi­ness­es – the total amount lent to busi­ness­es since a lender was estab­lished – at the end of the sec­ond quar­ter stood at around £3.4 bil­lion, com­pared with £2.5 bil­lion at the close of 2015.

A relat­ed area that has become increas­ing­ly impor­tant is the crowd­fund­ing space, where star­tups and new­ly launched com­pa­nies have been able to raise sig­nif­i­cant sums. Accord­ing to the Nes­ta report, equi­ty-based crowd­fund­ing plat­forms raised more than £245 mil­lion in 2015, up from £84 mil­lion in 2014. Thou­sands of investors have put cash into these plat­forms, with a total of 720 busi­ness­es suc­cess­ful­ly rais­ing cash.

Oth­er sources for financ­ing have emerged in the high-net-worth sec­tor. Wealthy investors, such as high-net-worth indi­vid­u­als and fam­i­ly offices, look­ing for bet­ter returns in the low-yield­ing mar­ket envi­ron­ment, have increas­ing­ly turned to the SME space to invest in fast-grow­ing com­pa­nies at an ear­ly stage.

The impact of Brexit on lending

Look­ing ahead to 2017, the key chal­lenge for firms is like­ly to remain Brex­it. With indi­ca­tions that Arti­cle 50 is like­ly to be trig­gered ear­ly in the year, cor­po­rate trea­sur­ers will be forced to plan ahead for any poten­tial fall­out.

A lack of clar­i­ty over what the gov­ern­ment hopes to secure from nego­ti­a­tions has led to much mar­ket spec­u­la­tion and put increased pres­sure on the val­ue of ster­ling.

“In the area of trea­sury, the impact of Brex­it was large­ly fac­tored in before the vote and that was the reduc­tion in the val­ue of the pound; we’ve seen that crit­i­cal­ly more recent­ly and the impact is now being felt even more,” says Mr Peters at Ali­um Part­ners.

The first thing to know about man­ag­ing liq­uid­i­ty is to get as much cash as you pos­si­bly can

“From the clients we’ve been talk­ing to, they are more inter­est­ed in ensur­ing they are cov­er­ing liq­uid­i­ty and plan­ning their cash man­age­ment. The reduc­tion in the val­ue of the pound has giv­en increased impe­tus for trea­sury peo­ple across more busi­ness­es.”

Ulti­mate­ly, busi­ness­es are like­ly to face ongo­ing chal­lenges in the months ahead as uncer­tain­ty con­tin­ues to dog the mar­kets. The fund­ing chal­lenge will dif­fer from com­pa­ny to com­pa­ny, how­ev­er there are a num­ber of things that cor­po­rate trea­sures can do to pre­pare.

“The mar­kets are very dif­fer­ent depend­ing on what your size and struc­ture is,” says PwC’s Mr Umbricht. “The one thing I believe that every­body has in com­mon is man­ag­ing cash.

“The first thing to know about man­ag­ing liq­uid­i­ty is to get as much cash as you pos­si­bly can. You reduce the need to fund your busi­ness from exter­nal bor­row­ing.

“The sec­ond thing you need to know is what your fund­ing and liq­uid­i­ty risks will be in the future. You real­ly need to align your liq­uid­i­ty man­age­ment and financ­ing strat­e­gy to sup­port your busi­ness objec­tive.

“What is very impor­tant to remem­ber in the cur­rent envi­ron­ment is that with Brex­it, and for­eign cur­ren­cy and com­modi­ties volatil­i­ty, it is very dif­fi­cult to pre­dict how much cash you will gen­er­ate and how much you will need.”

Prepa­ra­tion is key. With fur­ther chal­lenges on the hori­zon, cor­po­rate trea­sur­ers will need to make sure they are able to meet their liq­uid­i­ty require­ments in the months ahead.

“With the increased pres­sures you’re see­ing on the pound now, if you’re not fore­cast­ing prop­er­ly and not plan­ning ahead, it will quick­ly catch up with you,” warns Mr Peters.

“Don’t wait for it to hap­pen to you, for­ward plan and fore­cast to opti­mise your cash man­age­ment. You can see what’s going to hap­pen in the next six to twelve months; if you do noth­ing, you achieve noth­ing.”