Business Liquidity Strategies: 5 Steps to Plan for the Unpredictable

No business plan is written in stone. Your sales, manufacturing and distribution strategies may seem rock solid, but if a hurricane knocks out your transportation network, or a nationwide retailer presents an order that exceeds your capacity, even the most “solid” plan becomes “dynamic”—in very short order.

At times like this, your company’s liquidity is critical. Even when business is disrupted for reasons beyond your control, you need the financial wherewithal to cope. Resuming shipping after that hurricane could involve emergency repairs to your facilities and extra payments to trucking firms. Filling that national order may mean outsourcing work at a premium.

This is why CFOs must immerse themselves in their company’s roadmap and create contingency plans that cover even unlikely possibilities. While they can’t forecast whether a blizzard will disrupt their business over the winter, they can develop a plan of action to follow if one does.

When managing liquidity, many CFOs prioritize maximizing the return of every dollar that’s not being used by the business. This makes sense so long as everything goes according to plan, but the business landscape is often unpredictable. As CFOs plan their liquidity strategy, they simply must put a premium on flexibility.

That means striking a balance between a reasonable return and the availability of funds. To do that, CFOs must understand the dynamics of their organization, its industry and the overall economy. They must constantly take stock of the political and business climate to ensure the assumptions they developed during “budget season” will remain reasonable six months down the road.

This isn’t easy. For one thing, it requires business leaders to push the envelope of their comfort zone. No builder, for example, wants to contemplate the impact of a 500-year flood on their newest housing development. But natural disasters happen, and CFOs must honestly consider the likelihood and impact of such events if they’re going to survive them.

Where should you start? Begin with these five steps.

1. Identify Possible Risks Ahead of Time

Map out how your business functions from beginning to end, then hunt for scenarios that could put any piece of the operation at risk. Ask department heads and line managers about their worries. If the factory manager says losing a particular piece of equipment would be “disastrous,” be sure you understand why. Will production slow down, or shut down completely? Could employees be injured, or worse? Compiling a list of company nightmares will help determine the liquidity you’ll need to see the company through in each instance.

2. Run ‘What-If’ Scenarios

Also called “stress tests,” these are essentially emergency drills conducted on spreadsheets. Take your business plan, change assumptions to align with your managers’ worries, and see where the numbers lead you. What will happen to cash flow if an equipment failure shuts down production for a week? How much cash will you need to stay current on payables until shipments are back to their forecast levels? In addition, factor in timeframes. In some instances, you may need funds right away. In others, you’ll have time to work out a plan.

3. Create Contingency Plans

Each scenario should provide the parameters you need to develop a contingency plan. Because a challenge with sales will affect the business differently than a challenge with labor, your strategies must include an idea of the money you’ll need, when you’ll need it, and where you can get it. Comprehensive liquidity planning helps ensure that you’re prepared to address each scenario in the soundest way possible.

4. Be Smart About Debt

Regardless of any challenges you face, debt holders—banks, credit card companies and vendors—want to be paid on time. When a company runs up too much debt, it has fewer options in terms of accessing funds because lenders and suppliers may hesitate to grant additional credit. Every time you consider borrowing money, consider how the resulting debt service will affect your options in unforeseen circumstances.

5. Balance Your Investments

If you reserve funds by investing in, say, bonds or certificates of deposit, stay on top of how quickly you can convert each instrument to cash. If your company’s portfolio is heavy with long-term or hard-to-sell investments, you’ll be squeezed if confronted by the need to pay for immediate services. Again, weigh accessibility versus return.

Planning for unexpected events is difficult because it involves exploring uncomfortable ideas and setting money aside “just in case.” Business leaders rely on facts, but disaster planning is as much art as science. By understanding how unpredictable events can impact your company, you’ll be ready to work through situations you hadn’t planned for.