During COVID-19, Liquidity is a Lifeline



“Cash flow, even in a good economy is often a struggle for small businesses…but, now it has turned into one of the most, if not the most, important obstacle that they face.” -Holly Wade, director of research and policy analysis for the National Federation of Independent Business (NFIB)

Coming second to people in terms of risk priorities is liquidity risk. The potential for running out of cash and inability to continue operations is a serious risk with potential to knock organization out of business.

Addressing liquidity risk involves the following imperatives:

  • Adapting cash flow forecasting models and processes (frequently updating forecasting parameters to reflect the unfolding impact of the crisis)

  • Updating working capital management policies and practices (updating and actively managing for all working capital components (payables, receivables and inventory)

  • Maximizing cash on hand (exploring lines of credit, conversion of short-term assets, emergency borrowing facilities)

  • Reviewing capital expenditure budgets and commitments (triage short-term expenditures based on immediate liquidity impact. Evaluating medium- to longer-term projects that are currently underway.

  • Developing liquidity crisis contingency plans (considering drastic and rapid downsizing, default, deferred payments, accessing emergency funding access and asset sales options)

CFOs and other finance executives should prioritize payments and impose clear reporting metrics that track liquidity in real time. Also, consider offloading unused assets as this can be an efficient way to access much-needed working capital to endure a market downturn, and even accelerate the formation of new businesses to give the economy a boost.

Assessing cash flow should be the first step towards stabilizing businesses during these turbulent times.

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