Treasury

How You Can Maximize Liquidity in Uncertain Times


These three steps may help optimize your companies’ liquidity and working capital as economic uncertainty continues to influence the business landscape.

The COVID-19 pandemic required many businesses across the world to dive deep into their crisis management playbook. Changes in supply chains, customer behavior, consumer spending, credit costs and access to capital can profoundly impact revenue and expenses.

Companies quickly evaluated their liquidity positions at the onset of the pandemic, and as medical, economic and geopolitical uncertainty has continued, leaders from high-growth startups to mature companies are considering and reimagining the new normal. One of the more critical priorities as business models evolve is a refined focus on liquidity strategy.

There are a breadth of options and factors to consider, and every company’s liquidity needs are different. No matter your size, these options can help you to evaluate your short- and long-term funding needs, while keeping risk and resiliency in mind.

1. Understand Your Funding Needs

Why it matters today: In the midst of global economic uncertainty, it’s important to maintain a disciplined and pragmatic approach to liquidity management. If you have enough cash on hand to fund your operations, ramping up your debt could lead to unnecessary costs and liability. And as yields on excess cash have severely diminished, the value derived from the improvement of working capital becomes even more important.

How you can prepare for tomorrow: There’s a natural tendency to take swift action in times of crisis, but it’s critical to have a strategic focus for your business and stay well-positioned for the long term. A few ways to do that may include reducing operating costs, minimizing the impact of unexpected disruptions and continuing to review business investment opportunities via capital spending or acquisitions. 

Questions to consider:

  • How much cash do you need today to support daily operational needs?
  • What are your short- and long-term funding needs?
  • What are your future cash flows and what assumptions have you used to calculate them?
  • Have you considered the impact of foreign exchange and interest rate risk?
  • Have you calculated your capital expenditures and debt obligations?

High Growth Startups

Startups may focus on fundraising and sourcing capital, mobilizing it effectively and optimizing cash on hand.

Plan for different scenarios and be willing to nimbly rethink aspects of your business and financial strategy, including reducing operating costs, pivoting products or services to capture new segments, adjusting valuation expectations, or engaging new potential suitors and investors.

In its 2020 Working Capital Index, J.P. Morgan found that the hardware and software industries experienced some of the highest declines in cash levels year-over-year. 

2. Identify Sources of Liquidity

Why it matters today: With elevated credit spreads and volatility in the lending markets, identifying and leveraging sources of internal or intercompany funding are crucial. Idle cash balances held across different accounts, entities or regions can be put to work to fund operations, pay down debt or help build cash reserves. Non-operating balances held on deposit accounts or in low-yield investment alternatives should also be considered for strategic deployment.

How you can prepare for tomorrow: With the expectation that treasurers will be asked to do more with less, it’s important to have a clear line of sight and access to liquidity across your organization. Evaluate the cost/benefit of holding idle or low-yield, non-operating deposit balances and look toward solutions that enable centralization of liquidity and self-funding within your organization.

Questions to consider:

  • Where does cash sit within your organization (accounts, entities, jurisdictions)?
  • How do you manage liquidity and funding to ensure optimal use across the organization?
  • Do you have idle or trapped cash that could be put to better use?
  • How are you managing your reserve/strategic cash (non-operating balances)?
  • What are the current investment yields and returns on your reserve/strategic cash?
  • Do you have funds overseas that could be repatriated?

Mid-to-Large Corporations

A mid-to-large-size company may focus on consolidating liquidity across regions and currencies to reduce the burden of debt, or holding cash on hand to fuel a strategic acquisition that diversifies its revenue sources or brings unique efficiencies. Engagement with IT resources may also be prudent, as firms could benefit from new technologies that simplify processes and reduce overhead or even open new opportunities for revenue.

3. Engage in Thoughtful Forecasting

Why it matters today: Forecasting in times of unprecedented volatility and change can be particularly challenging. But it’s important to have proper oversight of your cash positions so you can make informed decisions for the future.

How you can prepare for tomorrow: Reviewing cash flow projections daily or weekly can help you keep an eye on liquidity needs. This may need to happen even more than once per day during crisis mode. It’s also important to develop future projections based on suppliers and customers, receivables and payables data, current macroeconomic indicators and the risk of disruption for your industry.

Questions to consider:

  • How do you ensure oversight of your cash positions?
  • What internal structures and IT tools do you have in place to manage your cash?
  • How many banking providers do you work with?
  • Does anyone provide you with a consolidated view of your global cash positions?
  • How often do you review your account structure and provider network?

By following these steps, as well as by managing your burn rate and assessing your counterparty risk, you can help your business remain resilient in the face of an uncertain future.

IMPORTANT INFORMATION: J.P. Morgan and Chase are marketing names for certain businesses of JPMorgan Chase & Co. (“JPMC”) and its subsidiaries worldwide. Products and services may be provided by banking affiliates, securities affiliates or other JPMC affiliates or entities.

Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any financial or investment decisions, a client or prospect should seek individualized advice from financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of the Client’s own situation. In no event shall JPMC or any of its directors, officers, employees or agents be liable for any use of, for any decision made or action taken in reliance upon or for any inaccuracies or errors in, or omissions from information in this content. We are not acting as any Client’s agent, fiduciary or advisor, including, without limitation, as a Municipal Advisor under the Securities and Exchange Act of 1934. JPMC assumes no responsibility or liability whatsoever to any Client with respect to such matters, and nothing herein shall amend or override the terms and conditions in the agreement(s) between JPMC and any Client or other person.

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