Good morning,
How confident are execs when it comes to their company's cash and liquidity positions? Less and less, according to a new report.
This morning, Deloitte released the results from a poll taken during the firm’s webcast “Cost containment and cash generation downturn planning.” CFOs were among the 590 C-suite executives surveyed.
Roughly 79.5% of respondents say they’re highly or somewhat confident of their company’s cash and liquidity management abilities, down about five points from 84.6% in October 2020, as the pandemic raged. Taking a deeper look at the findings of the poll taken in February, just 41% of respondents say they’re highly confident, compared to 46.7% who felt the same in October 2020.
“I'm not surprised with what we're seeing right now in the survey results," says Ryan Maupin, a managing director and national leader of Deloitte's Turnaround & Restructuring practice. And now with the collapse of several regional banks, "I would expect a heightened sense of urgency in some of those results,” Maupin says. Services for cost cutting or cost containment and services around cash, liquidity management, and working capital have all seen an uptick in demand over the past few months, he says.
Time to flex short-term liquidity muscle
“When we see a need for liquidity management, we see companies struggle with bridging the gap between—what are we forecasting for our P&L on the medium- to long-term? And what do we need to do to gauge and manage liquidity in the short term?” Maupin explains.
“What CFOs need to focus upon right now is making sure that they’re dusting off whatever plans, protocols, and processes they have in place for short-term cash flow and liquidity forecasts,” he says. Short-term liquidity is “not a muscle that companies flex often, or need to in better economic times,” but it should always be a priority, Maupin says.
Along with increasing interest rates, "the other area where the Fed is looking to combat inflation is to constrict liquidity," Maupin explains. "You've seen banks take a pretty significant hit in terms of the losses that they've experienced, particularly mortgages, over the last several months," he says.
Maupin is seeing instances where companies that usually seek financing from traditional banks are now turning to private credit. "But private credit is expensive and more expensive than a traditional bank loan," he says. "A concern for CFOs looking for ways to free up liquidity is—how expensive is that debt going to be?"
Cost containment
Chicago Fed President Austan Goolsbee is "certainly getting vibes" in the market that "the credit crunch or at least a credit squeeze is beginning," he told Yahoo Finance on Monday.
"As borrowing capacity and cash availability start trending lower, we are seeing a renewed focus on real-time liquidity and working capital management," says Michael Quails, a managing director of Deloitte Risk & Financial Advisory’s working capital management practice. "We expect this to continue for the rest of the calendar year."
In the worst cases, a lack of available liquidity can lead to widespread defaults and even bankruptcies. A May 4 report by S&P Global Market Intelligence found that U.S. corporate bankruptcy filings slowed in April (54) from a spike in March (70), which was the highest monthly bankruptcy tally since July 2020, according to the report.
“Some of the top cost containment strategies we’re seeing organizations pursue presently are direct spend shopping and indirect demand management," Quails tells me. Regarding “direct spend shopping,” companies are starting to price shop inputs (items, commodities, etc.) across vendors and focus on lead times and minimum order quantity, Quails explains. With “indirect demand management,” companies need to “clearly identify where they are indirectly spending and focus on where demand can be managed down,” he explains.
“We expect to see a more consistent cost management focus on these two strategies in the coming months,” Quail says.
Sheryl Estrada
sheryl.estrada@fortune.com
