How do you cope with liquidity risk in times of crisis and uncertainty?

1 Assess your liquidity position

The first step is to evaluate your current and projected liquidity position, which means how much cash and cash equivalents you have on hand, how much you owe, and how much you expect to receive and pay in the near future. You can use tools such as cash flow statements, liquidity ratios, and stress tests to measure your liquidity position and identify any gaps or shortfalls. This will help you prioritize your payments, negotiate with your creditors, and plan for contingencies.

2 Reduce your expenses

The second step is to reduce your expenses and cut any unnecessary or discretionary costs. This can include renegotiating contracts, consolidating suppliers, postponing projects, downsizing staff, or selling unused assets. You can also look for ways to improve your operational efficiency and productivity, such as automating processes, outsourcing functions, or using cloud-based solutions. The goal is to lower your cash outflows and preserve your cash reserves.

3 Increase your income

The third step is to increase your income and generate more cash inflows. This can include increasing your prices, offering discounts or incentives, expanding your customer base, diversifying your products or services, or applying for grants or subsidies. You can also look for ways to accelerate your receivables and collect your debts faster, such as issuing invoices promptly, enforcing payment terms, or offering payment plans. The goal is to boost your cash revenues and improve your cash conversion cycle.

4 Manage your inventory

The fourth step is to manage your inventory and optimize your stock levels. Inventory is a key component of your working capital, but it can also tie up your cash and increase your storage and maintenance costs. You can use techniques such as just-in-time, economic order quantity, or ABC analysis to determine the optimal amount and frequency of inventory purchases and deliveries. The goal is to balance your inventory supply and demand and avoid overstocking or understocking.

5 Secure your financing

The fifth step is to secure your financing and access additional sources of cash. This can include applying for loans, lines of credit, overdrafts, or factoring. You can also look for alternative forms of financing, such as crowdfunding, equity financing, or asset-based lending. You should compare the costs, benefits, and risks of different financing options and choose the ones that suit your needs and goals. The goal is to increase your liquidity buffer and cushion your cash flow shocks.

6 Monitor and adjust

The sixth step is to monitor and adjust your liquidity management plan regularly and adapt to changing conditions. You should track your cash flow performance, review your liquidity ratios, and update your forecasts and scenarios. You should also communicate with your stakeholders, such as your employees, customers, suppliers, lenders, and investors, and inform them of your situation and actions. The goal is to stay on top of your liquidity risk and respond proactively and flexibly.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?