Managing in the Downturn : Boosting liquidity

Summary of the Economist article

Drivers

• Faced with huge difficulties of their own, banks have tightened their purse strings, lending less and driving up the cost of credit to consumers and corporations.
• Opinions differ as to how long and deep the global slowdown might be. But the combination of a battered banking system and shell-shocked consumers mired in debt suggests it could be particularly hard for many businesses, whatever the duration.
• For the foreseeable future, bank credit is likely to be harder to come by and will certainly be more expensive than when the financial crisis began.

Cash boosting strategy

• Companies have tapped new pools of capital, like sovereign-wealth funds, to bolster their finances. In July GE, an American conglomerate, set up an $8 billion, 50-50 joint venture with Mubadala, an investment arm of Abu Dhabi, to invest in areas such as clean energy and aviation.
• Sell businesses no longer central to a firm’s strategy. Although prices for corporate assets have been depressed by the downturn, this has not deterred some companies from putting them up for auction. This week, for instance, GM and Ford sold shares in Suzuki and Mazda respectively. By selling their stakes back to the Japanese firms, the American carmakers raised a total of $770m of badly needed liquidity.
• Letting less cash go out of the door. Several big companies including Alcoa, an American aluminium giant, Target, an American discount retailer, and AkzoNobel, a Dutch firm that makes paint and specialty chemicals, have recently cancelled plans to buy back shares using what was previously viewed as excess cash. Companies are starting to trim dividends too, though this will be unpopular with investors expecting a regular stream of income.
• Stretching out the payments on bank debt can also preserve cash. And firms should look out for opportunities to refinance existing loans early to give themselves greater financial flexibility.
• Put under the microscope a company's working capital, or the cash that gets tied up in day-to-day operations. “The first place to look for this money is in a firm’s inventory,” says Wayne Mincey, Hackett’s chief operating officer. All too often, poor sales forecasting and production planning mean that a lot of cash ends up trapped in a company’s warehouses in the form of unwanted products.