Maximizing Liquidity During Economic Uncertainty

December 16, 2020

2020 has been a chaotic year, and the uncertainty that we’ve witnessed is likely to continue into the foreseeable future. For your business’s sake, it may serve you well to maximize the liquidity of your commercial finances until the world’s economies start to stabilize. Converting your assets to cash will equip you with the flexibility you need to navigate an unpredictable future.

The Economic Upheaval of 2020

Both the Covid-19 pandemic and the November election have led to volatility in the stock market and global economy. As of this writing, the presidential race has been called in favor of Joseph Biden Jr., but Donald Trump has promised to challenge the results. There’s also a strong likelihood that the Senate race won’t be decided until a double runoff in January.

A Democratic (or tied) Senate could lead to significant policy changes, which may cause substantial short-term volatility in the stock market and specific industries like fossil fuels and pharmaceuticals. If the Senate stays in Republican hands, we’re more likely to see gridlock and a more stable market.

The other factor has been the COVID-19 pandemic. Between October 23 and October 28, the Dow Jones Industrial Average (DJIA) dropped nearly 2,000 points in response to a spike in U.S. coronavirus cases and stricter lockdowns across Europe. As of early November, the number of new cases in the U.S. exceeds 100,000 per day, raising concerns that we’ll see another economic slowdown like the one we saw in March of 2020. A vaccine developed by Pfizer and BioNTech is showing promise, but logistical concerns remain about vaccine production, rollout, and uptake by a nervous populace.

The election results might result in significant policy changes around the handling of the coronavirus — Biden has already announced a plan involving medical subsidies, paid leave, and business loans — but we won’t know the economic impact of that plan until at least early 2021. Considering the uncertainty of these two factors, predicting the near-term future of the American economy is going to be extremely difficult for the next year or so.

Take Stock of Your Funding Needs

Many businesses have seen their revenues take a severe hit, thanks to changes to supply chains, consumer behavior, customer spending, credit costs, and access to capital across almost every industry. Every company’s liquidity needs are different, but the first step for any company is to assess their situation.

Liquidity management requires a disciplined, well-managed approach. Taking on debt might be more appealing than spending your cash reserves, but it can also set you up for additional costs and liabilities. On the other hand, yields from holding extra cash are meager right now, so it’s vital to ensure that you’re getting the best possible value from your working capital.

Address your business needs with the following questions:

• How much cash do you need to support your day-to-day operations?
• Do you have significant short- and long-term funding needs beyond the day-to-day?
• Do you anticipate any significant changes to your cash flow in the immediate future? Take stock of client contracts that might be expiring, vendor prices that might be renegotiated, increases in rent or other overhead, and similar shifts.
• Will your business be affected by foreign exchange and interest rate changes?

It’s tempting to take swift, drastic action in a crisis, but you should also consider your company’s long-term future. Selling major assets can create a significant cash boost now, but you’ll have to replace those assets in the future, potentially at a higher cost. Start by focusing on operating costs and business investments before making more significant moves.

Find Sources of Liquidity

If you’re carrying cash balances across different accounts, regions, or entities, now’s the time to put them to work funding operations, paying down high-interest debt, or building cash reserves. Corporate bond spreads have narrowed significantly over the last nine months, and the lending market is volatile, so finding internal sources of company funding will be crucial.

With interest rates near zero, consider the costs and benefits of holding onto non-operating balances and look for ways to centralize your liquidity. Consider:

• Where is your cash held? Which accounts, entities, and jurisdictions? How quickly can you move cash from your various holdings?
• How do you manage liquidity across your organization?
• Do you have idle cash that could be more effective somewhere else?
• How are you managing your reserve cash?
• What are the investment yields on your reserve cash?
• Do you have overseas funds that you can repatriate, and what are the tax implications of that move?

Look Ahead

It’s challenging to weigh the importance of staying afloat in the short term against staying competitive in the long term. You need to maintain oversight of your cash positions so you can make better-informed decisions in the short and long term. Keep an eye on your cash flow projections daily or weekly — in times of instability, your forecasting and projections will change significantly and frequently.

Pay close attention to the news and trends in your industry, macroeconomic trends, receivables and payables, suppliers, and customers, and develop your projections accordingly. You’ll need to be nimble and flexible for a while, so diligence will be crucial.

Talk to First Western Trust

Navigating the next few months and years won’t be easy, but you don’t have to do it alone. At First Western Trust, we employ some of the most knowledgeable people anywhere regarding commercial banking, investing, and cash flow management. We can take a holistic look at your company, goals, and values to determine the safest and most profitable path forward. Ready to get started? Get in touch.