Weathering a cash flow crisis: Liquidity and open lines of communication
As 2020 comes to a close, businesses shift focus to cash flow.
For many middle market businesses, 2020 started strong and CFOs, controllers and owners alike shared optimism about the year ahead. As the year comes to a close, sentiment among business leaders varies — and highlights the need to ensure the right focus on cash flow.
“Earlier this year, most businesses were humming along and then, suddenly, it felt like the sky was falling.” says Chris Trimbach, CIBC Middle Market Banking Relationship Manager. “Liquidity and cash flow challenges quickly moved to the top of the agenda for many companies.”
As a relationship-focused bank, the first step for CIBC relationship managers was to reach out to clients, particularly those in industries hardest hit by measures to slow the spread of COVID-19.
“Our client conversations at the beginning of the pandemic were challenging,” recalls Jeff Janza, group head of US Commercial Banking in Wisconsin. “Many clients had not been in the mode of having to watch over their business quite so intently. The pivot to preparing 13-week cash forecasts and focusing on the uncertain length and impact of the pandemic were sometimes difficult conversations.”
Meg Fisher, St. Louis Market President for CIBC US Commercial Banking, added that, for many business owners, it was the first time they had zero visibility into demand for their product or what happens next.”
Managing cash and liquidity through periods of either significant growth or downturn is paramount to a company’s success — and both scenarios have occurred during this pandemic. Some industries have been negatively impacted by COVID-19, while others have seen positive results or remained neutral. In addition, a bank’s understanding of cash flows is key to helping clients manage their credit needs and assist them through any cycle.
“When a company experiences a sudden decline in sales, for any reason, it is critical to have a line of credit that they can tap to weather the storm and open communication with their banker,” Trimbach explained.
For some clients, that was defensive draws on existing lines of credit. For others, it was applying for the Paycheck Protection Program (PPP). CIBC’s position as a preferred Small Business Administration lender was instrumental in helping us secure PPP financing to every client who applied.
Being a relationship-driven financial partner, commercial bankers can step in as an advisor for businesses, helping leadership manage cash with open lines of communication. For Trimbach, he starts with “‘How is your liquidity?” as the main question in helping a client through any challenge. “First and foremost, we want to make sure they can manage the day-to-day,” asserts Trimbach.
Usually, companies base visibility upon a prior year’s performance and demand or a built-up sales pipeline. In the case of COVID-19, the marketplace changed so rapidly that many companies had very little insight into what was happening. Depending on the business or industry, some companies might have the benefit of locked-in contracts or orders, while others may need to shift entirely.
From situational planning and financial modelling to discussing necessary adjustments in lines of credit, bankers help clients effectively plan and prepare to fund their operations through a variety of circumstances.
“Now, 8 months into the COVID-19, all of our clients have had time to adjust to the impacts of the pandemic and have gotten into a good routine of watching over their weekly cash flows. They’ve become better at predicting the evolving near-term impact on their business,” adds Janza. “During periods of uncertainty, like we have experienced in 2020, we would advise our clients to maintain higher-than-normal levels of liquidity (cash on hand combined with access to bank financing). By doing this, our clients will be better prepared to weather a prolonged downturn in their business or to be able to take advantage of a significant growth opportunity without sacrificing the company’s independence and current ownership structure,” he advises.