Running on Empty – Cash Shortages

A cash shortage is frequently a symptom of one or more larger problems. The list of such causal problems is long, and includes (i) failed acquisitions and other initiatives, (ii) declining operations, (iii) inadequate capitalization and (iv) management errors. Failure to solve the cash shortage may easily result in corporate demise.

In our view, solving this issue requires both coming up with the additional liquidity and taking steps to prevent the rescue cash from leaking away. Without dealing with both pieces of the puzzle, the problem will likely recur. Moreover, without the “leak” addressed, would-be providers of rescue cash may shy away from the situation until they are comfortable that the company – and its cash self-sufficiency – are stabilized.

For companies that are searching the couch cushions in order to meet the next payroll, hearing those words can be like a bucket of cold water in the face. Without the next bit of cash, there will be no employees. And without employees, there will be no stabilization and ultimately no company.

But all is not necessarily lost. To illustrate, let’s assume you find yourself in a dire situation in which the company will run out of cash within a few weeks, there are no “loose change” assets and no incremental liquidity available through “conventional market-based” means. You need to ask yourself the question of who the “biggest losers” will be if the company fails in the immediate future:

Banks. Although many secured lenders pride themselves on having collateral coverage and managing the ultimate recovery with a margin of safety through financial covenants, it is a rare bank that actually wants to test its liquidation assumptions in practice. If secured lenders can be convinced to bridge to an event – such as a near-term asset sale – the company may be able to live to fight another day. Such transaction could be sponsored by an existing company constituency or by a third party.

Major stockholders. If a major financial backer believes that the liquidity crisis is temporary – and Old Equity value can still be salvaged – it may be willing to consider an advance (likely on onerous terms). Or if the backer still likes the company, but views the capital structure as hopeless, it can provide an acquisition proposal that could be implemented quickly (perhaps with the support of the bank).

Large customers and vendors. On occasion, a company’s operating partners may experience terrible disruptions in their own operations if the company were to fail. We have found that such partners may indeed be willing to provide emergency liquidity under certain conditions.

Junior creditors. Bondholders, mezzanine lenders and other such constituencies may also be willing to advance monies in order to preserve value for their existing holdings.

So, even if the company is staring at an imminent disaster, we hope the foregoing analysis illustrates that cash crises can potentially be dealt with. But as we alluded to above, the solution may have to come at great cost.

Without liquidity and an adequate warchest (the exact opposite of having a cash crisis), a firm’s reorganization options may be limited. Some of the solutions enumerated above would result in a near-term sale of the company.  While such a “fire sale” may save the business operations, stockholders could easily end up being eviscerated. Conversely, if the company had the luxury of time with a longer-term turnaround strategy, more value could be preserved for all constituencies.

In the final analysis, time matters.  The longer the company has before hitting the cash “wall”, the more options it may have to deal with the problem. And the sooner experienced professionals arrive on scene, the prospects of implementing such options improve tremendously.

If you have questions about what this may mean for your company, please contact Leslie Glassman at ljg@gordiangroup.com to set up a discussion.

At Gordian Group, we are delighted to field these kinds of confidential inquiries.
To set up a call, please contact Leslie Glassman at ljg@gordiangroup.com.

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About the Series
Questions that Keep CFOs Up at Night

Dealing with the prospect of financial distress is obviously unsettling. People can potentially lose everything they have worked for their entire lives. Risks abound, with cash crises, creditor pressures, employee defections, and so forth. In addition, professionals and others have their hands out for fees (going broke ain’t cheap) and companies should be rightly concerned about “agendas” that may differ dramatically from those of the company, its owners and its management.

See the entire series here. Please subscribe above to receive an alert when we publish new posts. If you have a question that we haven’t addressed, please email us at info@gordiangroup.com