Liquidity vs Financing: Why do you care?

Liquidity versus Financing: How are they different, how are they related, why do you care?

A simple way to think about liquidity and financing is to consider the difference between opportunity and obligation. That is, liquidity creates opportunity; financing creates obligation.

To be sure, financing for capital investment provides capability for an owner to add assets, a new wing, new utilities infrastructure, or new data management systems for example.  On the other side of the ledger, however, financing requires either repayment, a guarantee of repayment, or transfer of equity to the financier.  Not all capital investments pay for themselves in a reasonable period of time, so the financier looks to revenue from existing operations as at least a partial source of funds.  The new obligation limits the owner’s ability to make other investments until this one is either repaid or well covered. Moreover, an owner’s ability to get reasonable financing changes frequently, even when the owner’s financial condition remains stable, as we saw when the economy collapsed and capital markets froze in 2008.

Liquidity on the other hand does not create obligation.  Rather it generates unencumbered cash, the lifeblood of any business, institution or government entity.  Increased liquidity or cash flow increases the business or institution’s health, strength, and flexibility – its ability to compete. The additional liquidity may self fund new initiatives.  If, however, the CEO chooses to leverage the enhanced liquidity through financing (the two concepts are related after all,) she will most likely be able to secure more capital on more favorable terms than before, thus enhancing the likelihood of success for her strategy.

There are multiple potential sources of additional liquidity, several of which are listed in the accompanying chart. To cite one example, we know of a software solution for critical functional areas of a hospital which produces both cost reduction through greater efficiency and revenue enhancement through greater utilization of facilities and staff. In one multi-hospital system, after a 12 to 15 month payback period, its implementation was projected to throw off $50-60 million in additional cash per year, which could in turn be leveraged several times over.  As one hospital CEO said, “I certainly know what I could do with that annuity to solve innumerable issues at my hospital.”

As we stated, this was a large, multi-hospital system, so even this sum might not be enough.  Thus the real secret to a proposition which stands out, is to aggregate multiple sources of added liquidity. On a large system like our example, think what reducing the average receivable collection period by fifteen days would add.  Then identify just a 10% reduction in energy costs. Where else can cash be found?

So why do you care, if you’re an architect, engineer, contractor or equipment provider?  Consider that many large institutions like hospitals or universities are often a collection of silos.  The various departments and executives responsible for them are rarely relating their own liquidity enhancement opportunities to investment needs in other areas of the institution. Even more rare are the occasions when there is a coordinated effort to aggregate potential liquidity sources across the organization.  As our CEO friend mentioned above said, “It looks like they’re selling software, so I’d never have any interest in meeting with them myself. I’d send them to see my IT guy or purchasing staff, and frankly they would probably get lost in the shuffle. But I see now they’re really selling cash flow, and I want to know about that.”

With that in mind, consider the impact of your conversation with the CEO, if you show up with a cadre of experts aggregating multiple liquidity sources (“project delivery partners” in our parlance) for a business proposition that would free up the cash he or she needs to implement his success strategy. In one move you are shaping your opportunity and putting yourself in the catbird seat rather than waiting  with your competitors for something to happen , so you can compete tooth and nail on an onerous RFP for some project of probably lesser scope.

What do you need to do?

1. Learn enough about the business issues for your client to understand where the liquidity sources could be found.
2. Cultivate relationships with experts beyond your normal network, who will help assess the liquidity opportunities and who are willing to share client intelligence with you.
3. Be ready to return the favor.

Then together you can move toward a business proposition that allows all of you – and most importantly your client – to win.