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Causes of Liquidity Problems in a Company

cash management Finance
New answer on Apr 30, 2020
6 Answers
3.0 k Views
Anonymous A asked on Apr 09, 2020

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!


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Anonymous replied on Apr 10, 2020

Hi there,

Since this is a cash related issue. One additonal area you might want to check is how is the Accounts Payable and Accounts Receivable cycle. Not exactly sure how AR and AP would play in a pirate ship scenario, but if we think of an actual company, if it messed up AR and AP (in particular if there is a lot of AR not collected and becomes bad debt), the company can get into cash problem.



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Anonymous replied on Apr 09, 2020

Hi, this sounds very structured

An other extraordinary cause could also be change in forecasted costs/terms of a creditor (supplier that has suddenly has a cost peak)

hope this helps

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Content Creator
replied on Apr 09, 2020
McKinsey / ex-Interviewer at McKinsey / I will coach you to rock those interviews

Hi T,

That's a good basis, I like it. Depending on the case what you can do next is to go deeper into revenues and break them down by type, and then do the same with costs and the other cash outflows to see where the problem lies.


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Content Creator
replied on Apr 10, 2020
McKinsey | Awarded professor at Master in Management @ IE | MBA at MIT |+180 students coached | Integrated FIT Guide aut

I would approach it from a cash-flow perspective

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Anonymous replied on Apr 10, 2020


I would approach this from a cash flow calculation point of view. My suggestion would be to see what type of inflows and outflows the company has (accounts receivable, accounts payable and also inventories -a decrease of this would increase cashflow-). You should also have a look at the cash position/reserves of the company like cash/bank savings and credit available. A good analysis on this would imply reviewing the above mentioned concepts going forward on a weekly/monthly basis.

Best, Fernando

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Content Creator
replied on Apr 30, 2020
McKinsey | NASA | top 10 FT MBA professor for consulting interviews | 6+ years of coaching
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