Improve Liquidity During and After a Pandemic

While health restrictions from the COVID-19 pandemic are winding down, the chances of an economic downturn are growing and many businesses face an uncertain recovery. Firms can navigate this volatility and mitigate risk by focusing on maintaining strong liquidity in the months to come.

As the early stages of the pandemic taught many business owners, the ability to be flexible is critical during periods of uncertainty. Here are ways to ensure your company’s liquidity remains strong regardless of what happens in the economy.

1. Focus On Cash Flow Management

Cash flow is an integral part of liquidity. Although accurate revenue forecasts may be difficult to calculate during periods of volatility, companies should focus on ways to reduce costs while exploring alternative revenue streams.

Firms also can review and improve their hiring processes. For example, some large companies, such as Netflix, have implemented layoffs to cut payroll costs, while others see increasing staff as a way to increase revenue. Companies may want to identify the best opportunities for their industries and adjust their hiring goals accordingly.

Opening a business credit card such as the Fifth Third Simply Business card or applying for a Fifth Third line of credit are additional ways to improve cash flow management during volatile periods. Unlike a term loan, these types of revolving credit only accrue interest when you draw on your available credit, making either one a useful financial backup.

2. Finance Insurance Premium Payments

Businesses of all sizes require multiple types of insurance policies, such as a business owner’s policy, general liability, and worker’s compensation. Your company could be subject to even more requirements depending on its other assets, such as real estate or a vehicle fleet.

Improve liquidity by financing these capital-intensive insurance premiums instead of paying upfront for annual coverage. The policy is used as collateral rather than using business assets to secure the loan. This strategy frees up that lump sum of capital to remain more liquid throughout the year, without sacrificing a quality insurance policy.

3. Create Better Inventory Management Systems

Supply chain issues are increasing costs for businesses while often hindering growth because of inventory delays. According to consulting firm McKinsey, shipping rates have quadrupled since 2019. In addition, 94% of Fortune 1000 companies report supply chain disruptions.

There are proactive steps that businesses can take to better manage stock (and as a result, liquidity) in this challenging environment:

1. Invest in data tools to better analyze demand. Look at different options based on your industry and volume.
2. Make purchasing decisions earlier. Prepare for upcoming inventory needs sooner than you usually do. Financing those upfront costs is easier when you have flexible credit available, like a business credit card or line of credit.
3. Source and approve new suppliers to serve as a backup. Avoid relying on a single supplier for raw materials or production. In case one has a factory shutdown or other issue, it is important to have alternatives lined up and ready to go in the event of a problem.

4. Improve Your Accounts Receivable Policies

Companies can protect their existing capital by maximizing account receivable (A/R) policies. Start by centralizing and automating A/R processing using software to expedite payments. Also it could help to expand data collection and analysis beyond days sales outstanding to include metrics such as past due invoices, unapproved discounts, and sales team overrides.

Firms can use that additional data to identify problem areas that need to be addressed. Depending on what issues arise, they may need to implement updates like changing the credit approval criteria for customers, shortening invoice net terms, or creating stricter guidelines for their sales team.

5. Build a Relationship with Your Business Bank

Having an existing relationship with a bank can help a business stay flexible and act quickly when needed. Many business owners learned this during the early days of the COVID-19 pandemic when the first round of Paycheck Protection Program loans became available.

Funds were exhausted within two weeks, and subsequent research from the Federal Reserve Bank of New York identified a correlation between funding approval and existing bank relationships, according to the Journal of Accountancy.

When the next wave of funding became available, Fifth Third was able to proactively reach out to existing customers and prepare them for the application process.

While this type of program may not be available again, it serves as an example of how having an existing bank relationship makes it easier to identify and seize time-sensitive opportunities.

To find out more about how Fifth Third can help your company manage its liquidity, contact a Fifth Third Business Banking Relationship Manager or reach out to your nearest Fifth Third Banking Center.