How companies’ cash position affects their options in a downturn

Cash has always been king but, given the pandemic’s impact on the economy, that is true now more than ever. However …

“Hording cash for the future isn’t a complete solution,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “But at the moment, a strong cash position enables companies to both overcome revenue challenges and be opportunistic — to have options and not need to be reactionary or inwardly focused.”

Altman says there are actions companies can engage in now to improve their current position. But at the same time, they should be thinking about seizing future opportunities and better insulating their business against future difficulties.

“It’s a time for action, but also reflection — a chance to figure out how the company got into the position it’s in and what it could have done to be in a better position,” he says. “Now is a time to take lessons from the crisis and use them to make a stronger company on the other side of the pandemic.”

Smart Business spoke with Altman about the role of cash today and how it affects the way companies approach the market.

How does cash set companies up to be offensive or defensive?

As demand for many products and services has declined, many companies are burning cash reserves at alarmingly high rates. Cutting costs and stimulus programs offered some relief for many but haven’t guaranteed complete success for the long term.

Those companies that had a less-than-ideal cash position when they were confronted by the pandemic are now playing defense, meaning they’re compelled to make decisions wholly to address short-term challenges rather than take advantage of long-term opportunities. This lack of options can make a company vulnerable.

Companies with ample cash reserves are in a position to play offense. They can take advantage of other companies’ challenges — for example, acquiring a struggling competitor for a very attractive price — and avoid reactive decision-making in the short term that could limit their opportunities in the long term.

How can companies maximize their cash position?

Companies should focus on their cash, collections and managing disbursements while also reviewing and managing the line item expense components. The latter should include a workforce review, prioritizing critical positions as the company operates in a reduced revenue state. Also look at every expense item to see where cutbacks can occur in both the short and long term.

Review and manage capital expenditures and evaluate how to lower leverage so that debt service isn’t an additional burden in a cash-challenged environment. A line of credit should be available as a backstop as an additional source of potential liquidity and is very important to have in place.

Also consider selling assets that are not critical for the future, and have a willingness to be creative in finding alternatives to generate revenue, even if in the short term, to maximize capacity and all resources in the company.

What should companies focus on for the remainder of 2020?

Companies should generally evaluate their cash position weekly or at a minimum monthly, with a focus on three-month intervals and re-evaluating as new information becomes available. Cash collections and disbursements are the priority, as are evaluations of what can be done differently to generate more cash and reduce expenses.

Because there’s a lot of uncertainty, it’s important to plan for the balance of 2020. As economic challenges occur, the best companies continue to look forward while dealing with the present. Challenge the status quo, and lean on experts to help guide your decisions and think through new ideas. To that end, bankers can provide insight-based new ideas on what they’re learning from talking with a range of companies.

While it’s tough, success, even during a crisis, is as much about dealing with the present as it is looking out to the future. Companies need to be opportunistic when the economy is challenged — be in an offensive state — and that requires both discipline and creativity. The alternative is being defensive or inwardly focused, which presents its own set of challenges.

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