A liquidity crisis. You’ve likely heard that phrase used a lot in recent weeks as financial markets respond to the global economic slowdown caused by the coronavirus/COVID-19. If you’re a small business owner, or an aspiring consultant who wasn’t in business during the 2008 recession, you may never have experienced a liquidity crisis. More importantly, you might not know the best way for your business to respond.
What Is A Liquidity Crisis?
First, let’s make sure we understand the different forms of liquidity. All of these are threatened in the current liquidity crisis.
First, there is market liquidity, which can be defined as the ability of assets to be converted into cash.
Second, there is funding liquidity, which describes companies’ ability to obtain external funding by borrowing.
Finally, there is accounting liquidity, which describes the health of a company’s balance sheet. i.e.- The company’s cash or cash-like assets in comparison to its liabilities.
In the simplest terms, a liquidity crisis describes conditions in which companies may be short on cash or liquid assets and find it impossible to obtain more liquidity through selling/trading assets or borrowing.
While the coronavirus has intensified the current liquidity crisis, the crisis’s origins run deeper. This crisis first became clear in the fall of 2019, when the Federal Reserve took action. They were forced to flood the financial markets with Treasury bonds to finance the current U.S. budget. After banks began buying all these Treasurys, large amounts of money left the institutional markets, creating a widespread shortage of cash.
How To Solve A Liquidity Crisis In Your Business?
The global economic slowdown, in combination with the liquidity crisis, will cause revenues to fall across virtually every sector of the economy. Many small businesses will be unable to meet their liabilities, forcing them to fail. So, what should small businesses be doing? How is one to solve a liquidity crisis or at least manage its effects?
Cash is King.
The main problem your business will face, is a shortage of cash. Your revenues are likely to fall, and at the same time you will find it increasingly difficult to borrow money. This is because institutions everywhere will find themselves either short of cash or hoarding what cash they already have. As a small business owner, you need to make it your priority to increase your cash holdings as quickly as possible in the short term. In a time of liquidity crisis, having cash now is more important and more valuable than relying on cash later. This is the origin of the old adage, “A bird in hand is worth two in the bush.”
Cut All Possible Costs
Perhaps the most important thing you can do in a liquidity crisis is to radically minimize costs. This enables you to keep as much cash on hand as possible to weather the financial storm. Some of these cost-cutting measures may be obvious. You can lay off or furlough unnecessary staff. (Though perhaps for moral reasons you may consider this the option of last resort).
Eliminate or minimize travel expenses by transitioning to virtual meetings. (This is something the coronavirus may force you to do anyway).
Don’t be afraid to dig into the nitty-gritty of your overhead: reduce stationery costs, devote more time to comparison shopping, scale back marketing costs, and get rid of whatever unproductive or unnecessary assets you can. This is no time to be storing or maintaining unproductive inventory.
There’s nothing like a liquidity crisis to help you wring every penny out of your business operations. Do everything you can to chase down all the money you’re owed, including old receivables you may have given up on. You may also benefit from altering your billing schedules. Explore taking pre-orders or selling vouchers to bring in revenue faster. Where this fails, ask new customers to offer deposits or partial payments up-front instead of paying upon delivery. Don’t be afraid to send customers invoices earlier and more regularly than usual.
Finally, do everything you can to help clients pay. You can explore offering discounts for up-front payments. You can also offer more flexible payment options, including mobile and electronic payments you might not have considered before.
Negotiate With Lenders And Suppliers
In addition to accelerating revenues, postponing payments and liabilities is a helpful strategy for weathering a liquidity crisis. It’s worth reaching out to all lenders and suppliers, explaining your situation, and seeing what kind of flexibility they can offer. Some will be willing to postpone some or all your payments, especially if you have maintained a good relationship with them in the past.
Investigate Other Funding Options.
You may need to explore other avenues for shoring up liquidity in a liquidity crisis. Look into your options for borrowing funds. In a time of crisis, federal governments often offer special programs and favorable terms through quantitative easing. However, be sure the fundamentals of your business are sound. If not, borrowing more money will leave you in an even worse position down the road. If borrowing isn’t an option, you may even consider raising funds through selling equity in your business to investors who aren’t strapped for cash.
What Opportunities Does A Liquidity Crisis Present For consulting?
While business leaders may know most elements of their operation like the backs of their hands, many are not fully educated in all areas of their business. Many owners or CEOs likely don’t realize how many options they might have for addressing a liquidity crisis. This leaves them vulnerable, even if they run an otherwise sound company. These market conditions increase the need for consultants to help owners cut costs and maximize revenue. Consultants should market their services to owners based specifically on their ability to help survive the liquidity crisis and the concurrent recession.
An aspiring consultant facing a management consulting interview process would be well served if they can speak intelligently about how to manage a liquidity crisis.
The months ahead are going to be difficult. The coronavirus is grinding the economy to a halt, which is only worsening the liquidity crisis that had already begun to creep slowly into global markets. As companies, lending institutions, and investors get scared, cash may be increasingly hard to come by at a time when revenues for everyone will be slowing down. Now is the time for business owners to put their business operations under a microscope. Businesses will have to do everything within their power to conserve cash to see them through this liquidity crisis.
- Coronavirus Economic Impact On Consulting
- Fixed Cost: Examples, Definition, & Formula
- Variable Cost: Examples, Definition, & Formula
- Top Business Skills In Demand