Hi there,

I recently did a mock interview and I was given Ocean's Pearl case.
In that case, the company (a pirate ship) has liquidity problems derived from a risky business with high volatility in revenues and costs.

Trying to get a general lesson on liquidity from the case, I tried to define all (or at least 'most') of the potential causes for this problem.

Therefore, my question to the PrepLounge community is the following -->
How would you answer to the question:

Our client's company has liquidity issues (not enough cash, or declining cash reserves). What are the potential causes?"

My answer would be the following:

I would divide between 'extraordinary causes' and 'ordinary causes'

1. Ordinary Causes:
1A. Prolonged low profitability (revenues are lower than costs and I'm having trouble financing the company)
1B. Misalignment between costs and revenue (e.g. startup with future revenues still in beta phase, company with uncertain, volatile, or seasonal revenues)
1.C Misalignment between revenues and cash inflows or between costs and cash outflows (Net Working Capital issues)

2. Extraordinary Causes
2A. Relevane expenses or long-term investments financed with cash (Capex, M&A, etc.)
2B. Natural causes (e.g. a fire destroyed our plant)
2C. Bankruptcy of a debtor (e.g. a client who owed us money)

Feel super-free to let me know if something is not clear in my question :)
Thank you in advance for your precious inputs!

T