Few weeks ago, Trinity Capital International received an invitation from Reveal Niagara Business Magazine to write some thoughts about liquidity and its importance in business. In this space we want to share the ideas given by Omar González Pardo, Juan Camilo González and Mauricio Zuluaga. The original article, published by Reveal Niagara Business Magazine, is posted below:
Liquidity, the real resilience capacity.
One of Warren Buffett’s most popular quotes claims: “It’s only when the tide goes out that you learn who’s been swimming naked”. Today, when the world is facing a storm as a consequence of the COVID-19 pandemic disruption, most businesses, no matter their size, are struggling to navigate the crisis.
The social and economic effects currently taking place are just comparable with the Great Depression that started in 1929 and lasted until the late 1930s. This time, however, everything is happening faster. In a matter of days, the global economy fell into recession, as a consequence of the lockdowns and the social distancing regulations adopted to avoid the virus spreading. COVID-19 has rapidly transformed consumption habits which took years to be created. The new reality is testing the business adaptation capabilities and their future may depend on how resilient they are.
Traditionally, resilience has been defined as “the ability to recover quickly after something unpleasant”. Today, its meaning may be summarized in one single word: liquidity. It is the business’s ability to meet their regular obligations that lets them see the future with confidence. The lack of liquidity is a common issue among small and medium-sized companies and according to recent studies published by Bloomberg, most of them had just enough cash flow for up to two months. This situation becomes a national concern when analyzing the role played by small businesses in the economy and labour market.
In Canada, as it happens in most countries, the biggest job generators are micro, small, and medium enterprises. According to official data, the Canadian economy totalled 1.18 million employer businesses. Of these, 97.9% were small businesses. For a large number of them, current access to liquidity depends on external sources, such as tax rate reductions, credits, or government subsidies or grants.
Access to cash ultimately depends on business operations and management, rather than on third parties. Small and medium-sized businesses, start-ups included, should work on their own liquidity risk management. This is the best way to help small businesses to navigate through COVID-19 and get ready for the post-pandemic world. Now is the time for action, not simply for reflection. The current situation is the perfect opportunity to start working on managing liquidity and increase business resilience.
5 steps to lead the small & medium business’s ecosystem
There is no liquidity without having a saving culture. Crisis management plans are based on prevention, and savings are the best protection that a business can get. By improving companies’ money management skills, and changing daily spending habits, organizations can make a big difference. Small daily expenditures are usually underestimated, but when looking at them as a total, they have a huge impact. Some studies have revealed that those expenses can explain up to 20% of the offices and companies’ expenses. By creating a spending discipline culture and reserving a percentage, at least 10% of the monthly net income, small and medium-size businesses can create future liquidity to bypass difficulties. To conclude, the key point to guarantee future cash access is to adopt a savings strategy.
Long term strategy
Before the pandemic, a usual business plan for a small and medium-size organization used to cover the short horizon. An outlook of two months used to be the average. Today, it is important to start thinking of more long-term planning and double the length of time that a company expects to navigate with no income.
The conservation of liquid assets, those that can be transformed into cash rapidly, to serve as a cushion in case of a possible shortfall is more important than ever. Payables and promissory notes, tax refunds, among others, are useful instruments when the urgency for cash comes.
Emergency line of credit
Access to credit is a fast and good way to get liquidity and face challenging times. It is important to build a strong reputation to be able to get loans easily, based on good records. At this point, the recommendation for small businesses is to start creating that reputation into the banking system, even if that means to start with a low amount of loans that are paid back quickly. That is just the beginning, but in the future, an emergency line of credit can save a business.
The business ecosystem has a large offer of grants. Every year, local governments and private organizations seek to recognize and grant with a monetary incentive small and medium-size businesses that are impacting the Niagara Region and the Canadian entrepreneur ecosystem positively. Those grants can make the difference and help entrepreneurs to find a new source of cash.
The primary role of liquidity-risk management is to prospectively assess the need for funds needed to meet obligations and ensure the availability of cash under normal and stressed conditions. Crises are not opportunities per se, but the way we deal with them may open great possibilities. After COVID19, disruption, countries, organizations, and families are struggling to carry on. However, this situation has brought us a unique opportunity for reinvention, a very fashionable word these days. Beyond new business ideas, a new way to forecast the company’s performance may include a new pandemic outbreak as a potential risk, and there is not a better vaccine in the business world than liquidity.
Published in Reveal Magazine