The Essential CFO: A Corporate Finance Playbook

Chapter Fourteen

Ensuring Short-Term Liquidity

IN EXECUTING THEIR CAPITAL STRUCTURE STRATEGIES, CFOs should be hyper-vigilant in ensuring that the company maintains adequate and reliable access to liquidity. They should seek to guarantee the availability of cash under almost all circumstances—including unforeseen or even unprecedented dislocations in the financial markets.

To satisfy their needs for liquidity, CFOs may advocate maintaining a larger cash balance than needed to run the business. They should also develop contingency plans to obtain short-term funding in the event of either exogenous forces that can curtail access to the capital markets or company-specific issues that can cause sudden and unpredictable requirements for cash.

BANK LINES

For almost all companies—including nonprofits—their planning for liquidity typically involves arranging lines of credit from banks or other financial services companies. The short-term sources of credit can take various forms, such as banker's acceptances, warehouse financing, floor planning, and credit cards. Larger companies with strong credit ratings can also tap the commercial paper market, which can provide short-term unsecured financing at attractive rates.

However, as the mainstays of their financial planning, CFOs typically will arrange revolving credit lines that can fund the company's operating activities and back up their other funding sources, such as commercial paper financings. These lines can be unsecured or secured by ...