How to quickly improve liquidity in an uncertain economy

How to quickly improve liquidity in an uncertain economy

There’s no doubt that navigating the right path for your business during the COVID-19 pandemic will be difficult. In the midst of uncertainty, one thing is clear – you need to keep your business as liquid as possible.

Here are three steps you can take to quickly improve liquidity, to help you stay afloat in uncharted waters.

1. Figure out where your cash is coming from – and where it is going

Create a 13-week cash flow analysis.

While this step seems simple, it is rarely easy, especially in the current unique circumstances. Never in our lifetime has there been a time where the entire revenue cycle has endured a strain it faces today, from supply chain to customers. You need to consider every part of your revenue conversion cycle, anywhere your company is spending or receiving money. Once your analysis is complete, if you have any borrowing availability on your lines of credit, draw down the full amount. Right now, the key is to have as much cash as possible and provide yourself with as much time as possible to weather this storm. Next, make a priority list of both your key customers and your critical vendors. While creating this list, know that priorities will shift and change with the market, so be prepared to make course corrections along the way.

Develop a communication plan.

Your customers and vendors are in the same boat – which means proactive communication goes a long way. Make sure you have a plan for discussing your capabilities and expected payments from key customers, as well as your expectations and needs from your critical vendors. Do not be shy about discussing expected future orders from your customers and how their own payment terms and plans may change. As your priorities shift, make sure your communication plan follows closely.

2. Improve your cash flow on both sides of the equation

Consider new or revised policies on customer orders and payment.

Do you have a deposit policy? What do your net payment terms look like, and do they vary from customer to customer? And most importantly, how are you prioritizing orders? Normally, larger orders take priority – but right now you’re considering cash flow, not revenue. Which means a small customer who pays in 10 days can be far more valuable to you than a large customer who pays in 90. Also consider prioritizing a customer purchasing current finished goods inventory rather than one that requires a significant investment of your already-stressed manufacturing capabilities.

Stretch your vendor payments.

Sometimes a small adjustment in payment terms with a significant vendor – like stretching a normally 40-day window to 50 days – can make a big difference in your cash flow. Contact your critical vendors to seek flexibility while still maintaining the relationship, but keep in mind they are in the same choppy waters and require cash to continue operations.

Turn off all discretionary spending.

Whether it’s hiring freezes, a delay in raises/bonuses, holds on planned marketing or R&D, or a delay in capital expenditures, whatever isn’t essential to keeping the company moving right now should be cut or postponed to a later date.

Move whatever you can to maximize your near-term liquidity.

This is not the time to hold onto aged inventory in hope of getting the highest dollar – if you can’t borrow against it, use it to get the most cash you can. Even if you typically sell products at 150% of cost, if your lender is only letting you borrow against inventory at 80% of cost, selling slower-moving finished goods somewhere in the middle is still a way to improve liquidity. You’ll likely have multiple scenarios to consider with different categories of assets, depending on timing and market forces, so be flexible to find the best possible solution for each scenario.

3. Optimize your operating model

Don’t jump straight to the SG&A line.

Your business consumes cash throughout the P&L, so don’t just jump straight to fixed overhead. The revenue line is often overlooked as a source of liquidity. Do a small subset of your products or services generate the vast majority of your revenue (the old 80/20 principle)? While expansion may have helped you diversify your product offering and improve your long-term business model, right now it’s important to only sink capital into offerings that are quickly turning into cash and postpone the rest.

Assess your employee strategy.

You need to generate flexibility until the market stabilizes. What can you do to help your employees bridge the gap? Recently enacted federal legislation (CARES Act and Families First Coronavirus Response Act) provides some relief, and various states are also providing assistance programs. (Make sure you investigate any requirements before you make decisions about which relief package is best for your business.) For many employees, benefits are just as important as a paycheck. Check with your healthcare insurance providers to find out how to assist your employees in maintaining their benefits, even amidst a restructuring that may require them to be furloughed or work part-time. Consider right-sizing your work week to match order volumes. Could you reduce hours and pay your salaried workforce in a way that reflects the current volume of work? Though outsourcing is a common tactic for reducing labor costs, consider that it often comes with a large up-front outlay of cash.

Evaluate your vendors.

You may have a wonderful relationship with your current vendors, but now is the time to evaluate alternatives. But act fast. Everyone is looking for lower-cost providers that can still deliver, so demand may be high for certain categories. Would your current vendor be willing to negotiate on price based on current circumstances? Is there a cheaper option or substitute? The faster you consider this process, the better the outcome – it generally is best to be the first in line to ask for a deal.

Taking these steps can help you improve liquidity in your business and stay afloat during this uncertain time. For additional resources to help you stay focused and navigate the current business climate, please visit the Crowe COVID-19 resource center.

Want more insights on addressing coronavirus-related challenges? 
Go to the Crowe COVID-19 resource center for more analysis and updates. 

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Curt Gendron
Curt Gendron
John Grivetti - Large
John A. Grivetti III