In March, Boeing, one of the largest and most prominent companies in the United States, had two pieces of news hit the tape. One, the company is halting hiring, limiting travel, and limiting overtime to preserve cash due to coronavirus disruptions (here), and two, it had drawn the full amount available on its $13.8 billion revolver (here).
The first item, cutting expenses based on the uncertain outlook, is easy to understand. The second, however, is much more interesting. This revolver is structured as a delayed draw term loan, which is a committed financing vehicle structured to allow Boeing to draw it down as needed. There is no clear reason why Boeing needs an additional ~$6 billion of funding today, yet they are making the move to take the full amount of the loan. To me, this is indicative of one thing: Boeing is concerned that the banks behind the loan won’t honor their commitment, for a variety of potential reasons. This is not a formal position taken by the company, but the speculation on the rationale is out there (e.g., here).
Let that digest for a moment. One of America’s largest companies is willing to take on $6 billion of debt it doesn’t necessarily need right now (and pay the interest on it), perhaps because it believes some of the biggest banks in the world wouldn’t honor their financing commitments, or that said commitments could be reduced/pulled at any time based on the terms of the agreement between the parties. When things get serious, liquidity comes at a premium.
To be fair, Boeing’s problems are not limited to coronavirus disruptions, as the company continues to suffer from financial and brand damage resulting from problems with its 737 MAX aircraft. However, a key point remains regardless of the underlying source(s), which is…
Real Liquidity is Cash in the Bank
For small and midsize businesses, bank financing is not as readily available as it is for large corporates. Often, there is no “commitment” to financing, as agreements between banks and small companies often make reference to the bank’s ability to withhold, reduce, or decline funding for any myriad of reasons, or for no reason at all.
Do you have a line of credit? Are you worried about your cash liquidity based on the uncertainties of the impacts of the coronavirus pandemic? Don’t assume that line capacity is going to be there. We know this from experience dealing with the 2014/2015 oil market decline (which we may be experiencing again here in 2020), as we helped companies scrambling for financing in the wake of banks reducing or pulling available lines to reduce exposure to the sector. Important, these reductions or outright credit line eliminations were not the result of any covenant violation, borrowing base availability, or any action/inaction taken by the companies.
Often, credit access goes away when it might actually be used. Tough, but small businesses need to be aware that line capacity is not the same as liquidity. In uncertain times, making a grab for liquidity is worth the cost of the interest. Consider converting line capacity into cash on your balance sheet if you are worried about financing counterparties ongoing willingness to fund….credit markets can be fickle. Even if you don’t draw, it doesn’t hurt to ask your bank about any potential issues if you were to draw today. If anything, you will collect additional information which contributes to…
Forecasting is Critical in Volatile Environments
In the dual demand and supply shocks initiated by the coronavirus pandemic, smaller businesses face many uncertainties into the health and buying appetite of their customer bases and the ability of their vendors to continue delivering at volumes and prices expected. This wreaks havoc on the outlook, as forecasting becomes more difficult. Some might throw their hands up and say forecasting has LESS value in this environment because of all unknowns, but we would argue the opposite.
Scenario analysis, which is simply forecasting for multiple potential outcomes, is critical in volatile environments to characterize downsize scenarios. If you go to zero, you can be out of the game permanently, so understanding how multiple shocks can impact your business, profitability, and cash position highlight the impact of those risks that could bring you to your knees. So how to go about it?
First, you have to be able to credibly forecast. This in and of itself can be a limiting factor in smaller businesses. If you don’t have this capability, get help (plug). Second, think through the likely, and even unlikely outcomes on a number of fronts, such as:
- What if your customers pay you more slowly or cant pay you altogether (e.g. double your assumption for days sales outstanding, or DSO)
- What if your customers order less than you’d expect? 50%, 75%, even 100% less.
- What if your vendors won’t deliver to you if you go outside of payment terms (e.g. you are unable to extend you days payables outstanding, or DPO)
- What if your vendors can’t fulfill orders? How long can you run on existing stock levels?
- What if employees can’t make it into the office/facility and this impacts production? Does your finished goods inventory allow you to continue to fill orders? For a week, a month, a quarter?
- What if the terms or availability of your financing changes?
In many respects, these are obvious questions that any business owner would know to think or ask. However, the ability to translate them into specific financial/cash impacts is a different skill set. This can be the difference in losing sleep at night and making confident, even opportunistic, decisions.
No One-Size-Fits-All Answer
Every business is unique, as is every owner’s/leader’s risk appetite. Can you trade precious cash to ramp up inventories (to balance against supplier disruption), increase production (use labor resources now that might not be available later), or make additional investments into the business when sales could see a lengthy reduction from trend? Nobody can say for sure, which is the nature of volatile environments.
However, what we can agree on is this: liquidity is king and must be a focus, and there is market opportunity to be had in periods of disruption. Understanding “real liquidity” and having forecasting capabilities are must-haves in volatile times. Be safe out there!