Cash confidence

More than a decade ago, the global financial crisis clearly demonstrated how vital the visible and effective management of liquidity is to a company’s success or even survival.

The crisis shone a merciless spotlight on the same old shortcomings time and again: capacity or skills shortages, inadequate identification and management of risk, misinformed decisions, fundamentally misaligned incentives, disengaged staff, siloed behavior and accountability blackholes. 

Blissful ignorance of these gaps and constraints was enough to blow apart the credibility of a leadership team in an instant, no matter how impressive their record prior to an externally triggered liquidity crunch.

Several of our Leaders on Demand stepped into interim executive and board roles at major industrial groups and global financial services firms, following emergency bailouts by governments and reserve banks. 

In every case, building cash confidence was the number one priority to restore credibility and rebuild stakeholder support.  Crisis stabilisation 101.

Why something so fundamental is often lacking

The "Hierarchy of Competence" learning model describes the psychological states individuals follow from incompetence to competence in a particular skill. 

Conscience Competence Ladder, by Noel Burch

Initially, an individual does not understand or know how to do something and does not necessarily recognise the deficit. They may deny the usefulness of the skill. The individual must recognise their own incompetence, and the value of the new skill, before moving on to the next stage. The length of time an individual spends in this "unconscious incompetence" stage depends on the strength of the stimulus to learn.

The same applies for organisations. When a leadership team doesn’t know what it doesn’t know, their organisation's intuition can be wrong. 

Consequences that can be disastrous

The ultimate state of "unconscious competence" gives executives who specialise in turnaround leadership an intuitive advantage when gauging a situation that demands cash confidence. Too frequently, sophisticated businesses with respected board and leadership teams appear to sleepwalk into liquidity crises that can be avoided by tackling the fundamentals. 

Despite the intent of Australian legislators to encourage value preservation through early intervention, companies continue to drift into the jaws of distressed investment funds the insolvency industry feeds. 

These restructuring specialists love nothing more than a business with an urgent funding or liquidity need... and no options. 

Boards faced with an unanticipated liquidity requirement and reduced certainty around solvency are often cornered into recommending shareholders support a "not-fair-but-reasonable" transfer of value to someone with no prior economic interest in the business. 

ASX listed business sometimes follow a play-book that includes two steps that should be mutually exclusive: shareholder upside and de-facto control is offered to an investor providing rescue funding... and just months later insolvency is triggered, wiping out the economic interests of everyone else.

A simple course of action makes all the difference

It is critical that a leadership team orientates itself with the bigger picture when considering the different courses of action that are available to improve cash confidence.

Every situation is different, but companies that face liquidity or funding constraints exhibit symptoms that are common to most organisations, such as:

• Stretched leadership – juggling balls, miscommunication, dysfunctional behavior
• Out of date plans – focus on what's not going to plan rather than what is the plan
• Waning stakeholder support – added scrutiny, diverging interests, unilateral actions
• Instability – firefighting, workarounds, elephants in the room, heroic leaps of faith
• Unreliable information – inconsistencies, asymmetry, excess volume, vested interests

Having orientated yourself with the bigger picture, there are three courses of action to consider:

course of action (a) - leave things for now

This default option maintains the natural state of "unconscious incompetence". Unfortunately, it no longer remains an option if a stakeholder or restructuring specialist intervenes and suggests you need to follow…

course of action (b) - outsource the problem to an "external expert"

Being an expert on someone else's business is big business.  Off-the-shelf "play books" are marketed as logical approach to overcome the discomfort felt when volatility uncertainty complexity and ambiguity . This option is time consuming, distracting and a costly way of reaching "conscious incompetence" and typically concludes:

“Our analysis suggests a lack of cash confidence. Your organisation exhibits [insert common symptoms here]. Building cash confidence exceeds the scope of our services. We recommend additional services.” 

This trap leaves many boards cornered without options, which is why we always suggest you follow…

course of action (c) - activate your own organisation to build cash confidence

 A qualitative assessment to define the desired outcome, outline a tactical plan and build the case for reprioritising your resources should take you less than a week. If your backs are against the wall, it can be done in a weekend. You are then on track to:

• Mitigate the immediate threat to your credibility
• Demonstrate cash confidence with "conscious competence" by the end of the month, and
• Rely on the visible and effective management of liquidity that you've embedded into the fabric of your organisation.

Start asking the right questions

Company directors with perfect hindsight of a liquidity crunch often ask “why didn't someone explain this stuff before?” 

Reality check: responsibility for cash confidence, when it really matters, sits squarely with the board.

The company's objective of achieving the best possible outcome is not aligned with the commercial interests of the external experts who crowd around these situations in anticipation of stakeholder divergence and distressed deals.

Here are some questions you can consider after reading the board pack:

• Does our board skills matrix include building cash confidence and maintaining stability under liquidity or funding constraints? 
• Can I point to the board members that bring these skills?
• Would any of my fellow board members point in my direction?
• What proportion of CFOs have hands-on experience of maintaining stability under liquidity or funding constraints?
• What is the proportion of CFOs across my portfolio of board roles?
• Have I ever known a CFO who wouldn’t plan their escape if concerns about funding and liquidity are ignored?

Have you got the backs of your CEOs?

A growing number of directors recognise that the spotlight could soon be shining on the vital skills their organisations need to visibly and effectively manage liquidity. Have you made sure your CEOs have the benefit of the NED perspective?

The views expressed in this article are the views of the author. This article provides general information, does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information.