How to maintain liquidity in uncertain times 


The world entered uncertain times more than two years ago when the Covid-19 pandemic hit and the world took a drastic turn. And as we are getting out of the health crisis, we are walking into an economic crisis triggered by several global events and shifts. 

Along these years, businesses learned that maintaining liquidity is crucial to stay afloat. As we evolve into a post-pandemic world, one of the most critical priorities is to refine liquidity strategies. These will drastically change according to business needs. But no matter what type of company you own, there are some options that can help you reevaluate your short and long-term needs and prioritize risk and resiliency.

Tech companies are especially under valuation pressure as the economic outlook worsens and VC funds slow down their activity. A particularly harsh consequence of this is the mass layoff wave we’ve seen in the past months. This week, Shopify announced it would lay off 10% of its workforce.

All types of businesses can benefit from planning to survive right now, which means you should look forward to optimizing opportunities and mitigating risks. We’ll go through some strategies you can apply to ensure you are maintaining your company’s liquidity and extending your startup runway as we are probably heading to the next global recession.

Identify your funding needs and cash burn rate

A good question to ask yourself is how much cash you currently need to support your operations’ daily needs. Also, you should identify what your long and short-term funding needs are. 

Avoiding unnecessary liabilities and costs is fundamental. If you have enough cash to fund your operations, try not to take debt if possible. Maintaining a disciplined approach to liquidity may translate into reducing the impact of potential disruptions, a lesson that the Covid-19 pandemic left for us quite brutally.  You may need to reduce operating costs and optimize the cash you already have at your disposal.  Be open to reevaluating your financial strategy and valuation expectations.

The importance of budgeting and forecasting

A budget is probably one of the best strategies you’ll use. It is simple but done right, it can help you evaluate new hires and opportunities and allow you to visualize business goals so that all stakeholders and decision-makers are aligned in the company strategy. Its most important benefit is ensuring you have enough liquidity to fund your current and future plans and identify some unnecessary cost drivers.

Take a control-tower approach for your finances in the sense that you will need to have real-time and clear visibility of what’s going on. For example, regularly checking cash flow projections will help you be alert on your liquidity needs. 

Forecasting is particularly important during unprecedented times, even if it’s challenging. Try to develop projections so you can make informed decisions for the future and be as realistic as possible with the assumptions you make. You can review these daily and adapt them over time. 

Think of what your best and worst scenarios will look like and what costs will each of them have. Then, compare actual outcomes with the forecast assumptions you made.  Some companies even use behavioral modeling and analytics to predict what their liquidity may look like according to business decisions.

Identify where your liquidity is coming from

Optimizing the liquidity you have right now means you’ll have to identify each source of internal or intercompany funding carefully. This is because you may find idle cash balances that can be used to pay down debt, build cash reserves, or make other strategic deployments like closing an acquisition to diversify revenue sources.

Spend time doing a deep dive on where your cash sits within your organization, think about how much cash you are burning, and how you can optimally use it across your operation. You’ll need to do some cost-benefit analyses of what it would take to make these changes, but it will pay off in the long run.

Keep an eye on your relationship with banks

If you think you’ll need to approach a bank, do it while your position is strong and while you’re able to plan for adverse scenarios. Have early conversations with them on what risks your cash position may face and if there are potential covenant breaches. In short, you should anticipate these issues to be better positioned if you need support from your bank further on.

Keeping a healthy relationship with your bank means you’ll have to be honest and open to them and keep them informed. You should also be honest to yourself, as you have to recognize that the credit your bank allocated to your business will be limited. You’ll need to use it wisely and prioritize access to liquidity above other treasury needs.

Maintaining liquidity is one of the biggest challenges for companies facing economic crises. Still, it is vital to ensure that your company keeps a close eye on what is going on. You’ll have to plan for different scenarios and think deeply about some aspects of your business and financial strategy

Being realistic and pragmatic about your company’s position in the current context, including your cash flow forecasts, is fundamental. Although you may need to act fast, test all your decisions before to guarantee that they are aligned with the business’s short and medium-term objectives. 

These strategies can help your business remain resilient in the face of the uncertain times we are currently going through.

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