The saying “revenue is vanity, profit is sanity, but cash is king” was popularized by former Volvo CEO, Pehr Gyllenhammar, in 1988, following the global stock market crash of 1987. During that time, companies with adequate cash reserves weathered the downturn better than those who had poor cash management.
According to the Service Corps of Retired Executives (SCORE), 82% of businesses fail due to issues with cash flow – or liquidity. The cash necessary to pay one’s bills and payroll, take advantage of growth opportunities, and attract investors makes liquidity an important factor in determining the financial health and sustainability of a business.
So, it is no surprise that managing liquidity is key to the success of your business, requiring an arsenal of different strategies depending on the current state of the economy as well as the unique characteristics of your business. Whether the economy is experiencing expansion, contraction, or even worse – a recession – smart businesses remain vigilant about managing their liquidity, pivoting when needed.
In this article, we’ll present actionable strategies, expert advice, and proven solutions to ensure you are optimally managing liquidity for the success of your business.
The Importance of Liquidity Management in Any Economy
Liquidity management strategies help businesses like yours ensure they have enough cash to meet their financial obligations and day-to-day operational needs. Outside factors, like the overall economy, can have a significant impact on what strategies are available to you and how you deploy them.
During times of economic expansion, it is important to have the liquidity to take growth initiatives such as adding inventory, expanding product offerings or opening new locations. Businesses slow to grow may find themselves left behind by competitors or demand for their products or services.
Having cash on hand can be crucial for survival during times of contraction and recession. Businesses that find themselves navigating reduced revenues and merely maintaining operations will need to focus heavily on liquidity management strategies to see them through the lean times.
Uncertain or shifting economies exist as well, and businesses that find themselves in this environment need to remain vigilant and flexible. Knowing when and how to adjust in a timely manner is critical, particularly when dealing with supply chain disruptions, market shifts, and inflation.
Planning for inevitable changes is a smart strategy regardless of the state of the economy or your business’s financial stability. When it comes to liquidity management, the right financial solutions at the right time can make a significant difference – from mere survival to success.
Key Principles of Effective Liquidity Management
Effective liquidity management involves the following key principles:
- Cash Flow Management and Forecasting: Analyzing historical data and accounting for future variables are important when trying to make accurate short-term and long-term cash flow projections. Consider sales cycles, expenses, and receivables along with external variables when making predictions. And since “the only constant is change,” be prepared to pivot along the way.
- Building Cash Reserves: Where possible, businesses should look for opportunities to save and set aside money to build up cash reserves to mitigate the risks of downturns in the economy. As a general guideline, businesses should aim to accumulate three to six months’ worth of operating expenses. Holding these potentially critical reserves in high-yielding savings and money market accounts can make cash accessible while also putting it to work for your long-term goals.
- Managing Receivables and Payables: Ensure prompt submission of your invoices and be vigilant in managing your receivables, which can include the often-uncomfortable task of sending payment reminders that clearly outline expectations and consequences. Be mindful of timing on payables in terms of how they relate to receivables. Keeping these balanced is important to maximize cash flow and for overall fiscal health.
- Monitoring Liquidity Ratios: Economic uncertainty planning can be crucial, and developing ratios based on receivables and payables will help guide your decision-making process. Have a good understanding of key liquidity ratios like current and quick ratios (divide cash and cash equivalents by current liabilities) and know where you stack up within your industry norms. These make monitoring liquidity and financial health simple and easy for different constituencies within your business to understand. For more information on ratios, SCORE recommends this resource.
Strategies for Liquidity Management in Different Economic Environments
“We cannot direct the wind, but we can adjust the sails.” This famous quote applies as well for sailors on the open waters as it does for business operators. Let’s look at specific strategies to consider no matter what the direction of the economic winds.
- During Times of Growth
- Consider reinvesting profits while maintaining business financial stability.
- Leverage financing tools to fund expansion without draining cash reserves.
- During Times of Recession
- Cut non-essential expenses to maintain positive cash flow management.
- Focus on operational efficiency to keep costs and overhead low.
- During Times of Uncertainty
- Diversify cash sources to reduce risk, including securing lines of credit and liquidity funds.
- Model best and worst proforma case scenarios to better plan for periods of economic uncertainty.
Mitigate Risk with Smart Planning
Liquidity mismanagement can lead to serious problems such as missed payroll, unpaid suppliers, and even insolvency. Without enough cash on hand, businesses risk halted operations, damaged reputations, and missed growth opportunities.
Strategies from building cash reserves and diversifying income streams, as well as setting up flexible financing options, like a line of credit, can cover short-term gaps. A financial partner like Cogent Bank can help you create a strategy customized for your needs, ensuring you’re ready for challenges and positioned for growth. Developing a personal relationship with your banker is one of the most important decisions you will make. When the unexpected happens – and it will – having a trusted financial partner who knows your business ensures that they are poised to help with timely solutions. Whether it is supply-chain issues or an opportunity for growth, you won’t have to rush to educate your bank when the pressure is on.
How Cogent Bank Can Support Your Business
Cogent Bank offers customized business banking solutions to help you achieve your goals for your business. Cogent provides solutions for businesses like yours including:
Business Lines of Credit enable you to tap into credit when the need arises. Designed for maximum financial flexibility, a revolving line of credit can help meet your short-term financing needs like cash-flow management fluctuation, unexpected business expenses, or take advantage of discounted payments to vendors.
Business Term Loans provide an effective way to finance specific projects or initiatives for your business, typically with a fixed rate of interest. Whether earmarked for equipment or vehicle purchases, debt consolidation, refinancing, business acquisition, or as permanent working capital – a term loan can be just the right vehicle for your needs.
Business Checking, Savings, and Money Market Accounts are the basic building blocks of a business banking relationship. Cogent provides a variety of accounts with unique features that meet your needs, from low or no monthly fees to earnings credits, elevated transaction limits, and Treasury Services.
The Cogent Bank Difference
When it comes to managing liquidity, “time is money.” Having a partner like Cogent on your side can make it easier to react to changing market conditions and take advantage of timely opportunities. With locations throughout Florida, Cogent’s team of business banking experts live, work, and volunteer in your community – a key differentiator in how we do business.
We provide tailored solutions that support your liquidity management strategies, positioning you for growth and helping smooth out the challenging times.
Are you ready to build a liquidity strategy that works in any economy? Reach out to our team of experts today to learn more about liquidity management strategies at Cogent and how we can help your business move forward!
Disclaimer: The information contained herein is for informational/educational purposes only. The views and opinions expressed in this document may be those of the individuals and may not necessarily reflect those of Cogent Bancorp and its subsidiaries and affiliates, or the entities they may represent. Content contained herein may be used in connection with the advertising and/or marketing of products offered by Cogent Bank or Cogent Private Wealth. The material is not intended to provide or substitute for legal, tax, or financial advice or to indicate the availability or suitability of any Cogent Bank product or service. You should consult with a legal, financial, tax, or other appropriate professional(s) for your specific needs and/or objectives before making any decisions.
