An alert treasurer should take precautionary steps when recession is looming. Here is a risk management checklist, courtesy of Jeffrey Wallace, managing partner of Greenwich Treasury Advisors in Boulder, Colo.
- Make sure your short-term cash forecast isn't based on flawed historical accounts receivable (A/R) and inventory data from better times.
- Compare A/R to sales. Gross A/R may appear to be holding up, but if sales are declining, customers are also feeling the pinch and are likely to begin paying more slowly. This could trip up your forecast.
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- Brush up the long-term cash forecast, which is probably based on budgets. Business units not meeting budgets may try to hide that fact, so look closely at
- A/R, accounts payable (A/P) and inventory days to see what's really happening.
- Prepare to repatriate cash from overseas operations with excess cash or attractive access to credit. If you're selling to overseas subsidiaries, can you reduce payment terms or even get them to prepay? Include tax in repatriation planning.
- Look at debt covenants in light of revised cash forecasts. If you're likely to bust a covenant, think about when you want to have a conversation with your bankers. The bankers won't realize until quarterly financials, but if you bring it up sooner, you may get a waiver on better terms. Waiting may land you in a queue with other borrowers who violated covenants and get less sympathetic treatment.
- If you need another quarter's time before you have to renegotiate with your banks, look for window dressing: Are outstanding checks debited against cash or still considered A/P? Do you have discretion over how working capital line items are accounted for? Consider selling A/R without recourse to lighten debt.
- Hold a staff meeting and make sure everyone is clear on policies and roles. In tough times, it's important to prevent mistakes and confusion.
- Be prepared to explain why debt is increasing, and provide your CFO with accurate trend lines, options to conserve cash and ways to accelerate the company's cash flow if that becomes a necessity.
- Look to cut strategically by postponing capital expenditures or a stock repurchase. Be careful not to cut spending that supports sales, such as marketing. While treasurers fixate on cash flow, CFOs are searching for ways to boost revenues.
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