Improving liquidity in the era of COVID-19 and beyond

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:

• Monitoring accounts receivable: Companies should consider actively monitoring and following up on their accounts receivable. This could include monitoring aging A/R on a regular basis, following up with customers to identify and resolve issues, hiring additional staff to manage collections, involving sales people in collections processes, monitoring credit limits closely, and stopping shipments for past-due accounts. 
• Accelerating cash collections: Companies should consider ways to accelerate collections and reward early payment. This could include using ACH or other automatic processes to collect from customers, offering discounts for early payment, requesting or requiring down payments or pre-payments, or accepting settlements or partial payments for disputed items.
• Rationalizing customers: Companies should consider evaluating their customer base and identifying key customers (e.g. high volume, high profit, strategic) and the products or services most important to them. This information can help companies adjust their business model to prioritize high-value products and services that can help them attract or retain key customers.

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:

• Performing an inventory rationalization: Product-focused companies should conduct an inventory rationalization to segment their products by profitability, volume, and strategic value. This can help them prioritize product sales based on concrete value and help them identify underperforming or stagnant products they need to either rethink or liquidate and monetize the asset. In the current crisis, unit economics need to be at the forefront of inventory decision-making. Companies need to seriously question any unprofitable strategic products to determine if offering them is truly necessary to drive profitable sales. If they’re not essential, they should be eliminated.
• Monetizing low-performing asset groups: Companies should examine their inventory and identify slow-moving or obsolete inventory items. Liquidating these items could provide quick cash while also creating more inventory space for higher performing products. 

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:

• Conducting assessments of existing suppliers and identifying alternatives: Companies should assess the financial stability of their current suppliers in order to identify potential risks and identify alternative suppliers that might offer better pricing or terms.
• Diversifying sole-source vendors: Using sole-source suppliers can be a key supply chain risk, particularly given the current situation. Companies should consider diversifying their suppliers to better ensure continuity of supply.
• Assessing opportunities to return excess inventory: Companies should assess whether they can return excess inventory for credit, thereby reducing their cash requirements accordingly.
• Utilizing ‘interest-free’ vendor financing when possible: Companies that pay vendors early in order to receive a discount should consider adjusting their payment cycle or asking their vendors for extended payment terms. Before determining their course of action, companies should weigh the cost of short-term financing (e.g. interest) against any lost discounts. 
• Communicating and collaborating with vendors: Companies should communicate with their vendors to find mutually agreeable adjustments where possible. Open collaboration can help companies keep their vendor relationships strong. For example, companies could work with vendors to identify potential supply issues early, adjust payment or delivery schedules if needed, and adjust pricing.

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.

• How will we position our organization to be a “stronger, better company” on the other side of this crisis?
• How can we use this crisis to restructure and improve our business model?
• What have we learned from COVID-19, and how can we use this information to improve what we do and how we do it? Have we made the changes we need to make in order to be opportunistic as the COVID-19 pandemic wanes?

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