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


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What businesses need to know about the credit crisis and how they can tide over it

Published in: Business, Economy & Finance
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Meeting The Current Credit Crunch Head On .... 5 ways to do it

  1. 1. 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: )
  2. 2. 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 Anupam Jaiswal (Contact: )
  3. 3. 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. Anupam Jaiswal (Contact: )
  4. 4. 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 Anupam Jaiswal (Contact: )
  5. 5. life now, what it will mean for businesses and how they can be better prepared to meet the challenges thrown by the crisis. Anupam Jaiswal (Contact: )
  6. 6. 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 Anupam Jaiswal (Contact: )
  7. 7. 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 Anupam Jaiswal (Contact: )
  8. 8. 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. Anupam Jaiswal (Contact: )
  9. 9. 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. Anupam Jaiswal (Contact: )
  10. 10. 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. Anupam Jaiswal (Contact: )
  11. 11. 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. Anupam Jaiswal (Contact: )
  12. 12. 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: Anupam Jaiswal (Contact: )
  13. 13. 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 Anupam Jaiswal (Contact: )
  14. 14. 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 Anupam Jaiswal (Contact: )
  15. 15. 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 Anupam Jaiswal (Contact: )
  16. 16. 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. Anupam Jaiswal (Contact: )
  17. 17. • Collections: Proactive management of AR to evaluate, identify and prioritize accounts, collect and collaborate with external and internal business partners. Anupam Jaiswal (Contact: )