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Improving liquidity in the era of COVID-19 and beyond

June 11, 2020 / 8 min read

Concerned your company doesn’t have enough cash to weather the COVID-19 storm? Improve your liquidity, and set your organization up for a strong recovery by improving your customer management, inventory management, and vendor management. Find out how.

Over the past few months, businesses around the world have faced unprecedented challenges. The COVID-19 outbreak has wreaked havoc on a global scale, driving governments at every level to shut down large swathes of their economies. As a result, many companies have been forced to shut down indefinitely or severely curtail their operations.

While the pandemic is expected to drive ongoing uncertainty in the short term, many jurisdictions are beginning to move toward a new normal. While a positive trend, this move will take time. Companies need to recognize that a quick economic rebound is not guaranteed — they could face operational, supply chain, and sales challenges for months to come.

Companies need to recognize that a quick economic rebound is not guaranteed — they could face operational, supply chain, and sales challenges for months to come.

If businesses want to do more than survive, they need to consider the ramifications of the pandemic more broadly. Companies that embrace activities, such as improving liquidity, that both mitigate immediate risks and create longer-term opportunities will likely find themselves better positioned to succeed not only in the COVID-19 era – but beyond.

Focusing on business survival and recovery amid COVID-19

The topline goal for most organizations right now is to make it through the current crisis. This means having enough cash to weather the storm. Survival isn’t a given though. We recently conducted a liquidity assessment with various middle-market manufacturers, distributors, and business services organizations. What we learned was that, on average, respondents only have weak confidence in their ability to recover from the current crisis. 

Part of the challenge is that no one knows exactly when the pandemic will end or what the new normal is. For those companies working in low margin industries, any required changes to operating procedures could significantly hinder their ability to recover over the long term. 

While many unknowns remain as to what the business world will look like in the medium-to-long term, companies shouldn’t wait to make changes to their liquidity management. There are a number of activities companies can undertake to mitigate their risk of running out of cash — changes that could improve their liquidity quickly and, therefore, their ability to recover. 

Improving liquidity management: Focus on the hot spots

Running out of cash is one of the biggest risks an organization can face. This has always been the case, although COVID-19 has shone a spotlight on how thin the line between success and disaster can be for companies.

This is why liquidity management is so critical. It’s far more important than simply managing expenses and revenues on an income statement. To do it right, companies need to really focus on their balance sheet management, considering ways to better manage their working capital, long-term assets, innovation and other strategic business investments, and capital structure.

This is why liquidity management is so critical. It’s far more important than simply managing expenses and revenues on an income statement.

There is a lot that companies can do rather quickly to improve their liquidity when navigating such a complicated endeavor. As a starting point, companies can focus on three particular hot spots of liquidity management.

Customer management

Companies can improve their liquidity by taking a more proactive approach to their management of customer accounts in order to accelerate the collections process. This includes:

Improving customer management can do more than help a company drive liquidity in these uncertain times. It can also help them improve their day-to-day operational effectiveness.

Improving customer management can do more than help a company drive liquidity in these uncertain times. It can also help them improve their day-to-day operational effectiveness.

Inventory management

Inventory management is a major driver of liquidity and provides a strong bellwether as to the likelihood of an organization’s operations being efficient. Consequently, improving inventory management can have a resonating positive impact across an organization. Among the range of activities that businesses can undertake to improve their inventory management, two activities should be prioritized given the current situation:

Vendor management

Focusing on vendor management is beneficial not only for improving liquidity, but also for mitigating supply chain risks. Companies that take time to work with and communicate with their vendors could enhance their liquidity while also identifying potential supply chain challenges early. Specific vendor management improvement activities companies should consider include:

Emerging strong from the COVID-19 crisis 

Companies have already found ways to address their most critical risks with respect to the pandemic. Now would be time to focus on activities that will help them emerge from the COVID-19 crisis well-positioned to make a strong recovery.

We recently hosted a virtual panel discussion where senior executives of private equity firms weighed in on the ramifications of the pandemic and identified what companies — whether PE-backed or not — can do now to enhance their liquidity and improve their chances for long-term success.   

Russ Spieler, managing director of Capital Partners, said prioritization is essential. “If you’re preparing your company to eventually be sold, if you were hoping to retire or hit that next milestone, you’re still going need to do those projects and get them done,” he explained. Companies can’t simply stop but they should prioritize what they do to get the most value quickly. “Making a list of ‘this project is going to happen first,’ ‘this one's going to happen second,’ is critical … as we begin the restart.”

Gabriel Mesanza, a partner at Huron Capital, added that companies should look at activities that might have been difficult to move forward in the past but that could be essential given the current situation. “We feel that there’s this get-out-of-jail-free card as it relates to 2020 and the activities that we’re going to have to take both from a profitability perspective … and in terms of restructuring our businesses in ways that may have been too painful in the past,” he said. 

Mesanza gave transitioning to 100% virtual sales using Zoom as a platform as one example. “It’s a significant restructuring of our business on the sales side and allows us to really leverage what we always wanted to do — which was grow the business into more locations.”

Regardless of what actions companies undertake to enhance their liquidity, Michael Fieldstone, co-founder and partner at Aterian Investment Partners highlighted the importance of maintaining open communications. “Remind people of what your company’s values are to your customers, or vendors, or community so they know that they're part of it — even if they’re furloughed,” he suggested. Fieldstone also stressed the need to keep positive throughout the crisis. “Try and be realistic, but stay positive. People feed off your energy as a private equity firm, as an owner, as a CEO.”

Keeping sight of the big picture

While COVID-19 is causing unprecedented challenges, it’s also creating opportunities for companies to consider the bigger picture. By improving liquidity management, companies can improve their cash position now while also enhancing their strategic positioning, improving the efficiency of their operations and employees, driving profit margin improvement, reducing operating risks, and taking advantage of opportunities to reassess their business model. These types of improvements will not only help a company survive a health crisis but thrive in the world beyond it. 

Is your company ready? Ask yourself these questions.

Not sure how to answer these? We can help. Just give us a call.  

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