My career in business lending began in 1990 with a large, publicly traded company. Four years later, that career transferred to a local bank with an additional career path of wealth management.
That economic time period was challenging as the United States entered a recession in 1990. I sure learned a lot during that time, and it prepared me for the many economic cycles that followed. Although we are not formally in a recession now, history repeats itself.
...The truth of the matter is that you always know the right thing to do. The hard part is doing it.
COVID-19 shutdown – A random shock to businesses and individuals
We are now three months into the COVID-19 pandemic. It has been widespread and affected many businesses and individuals, but not all companies and individuals. The hard truth is that some businesses and individuals are doing quite well during this time. Those same businesses and individuals likely have a history that contains periods of a variety of random shocks where business and living was not so good. So how did they survive these prior random shocks? They understood the fundamental concept of having cash on hand personally and in their business.
Cash – part of a solid financial foundation
If you were panicking two weeks into this crisis, it is likely you did not have enough cash. Many businesses have grown over the years with debt and individuals have purchased material possessions with debt. Throughout my career, I have challenged businesses and individuals about their lack of cash on their balance sheets. The business owner would answer my question with statements such as, “I can sell inventory to raise cash” or “I can get a business line of credit from the bank.” Those statements are true if the economy is doing well, inventory is selling and if banks have not changed their underwriting and risk appetite. Individuals would reference back to their credit cards or personal lines of credit. Cash is a crucial component of a proper financial foundation.
How much cash is needed?
This question has been asked many times in my office and our loan committee. I am known to be a wise guy, so my simple answer to lighten the mood is, “More cash is better than less cash.” The serious answer takes some basic calculating. The first step is to calculate your monthly operating expenses in your business or your monthly personal living expenses. Multiply that number by three to six months as a rule of thumb for cash on hand. Initially, that number appears to be daunting. I promise you that closer business expense monitoring, retained profits with lower personal distributions and slower growth will naturally build your cash position. Individuals need to review monthly expenses and reduce their discretionary spending. Many successful businesses and individuals continue to increase that cash multiple over time.
Cash is needed now
Truthfully assess your situation and develop an action plan to raise cash. If your business grew too fast, consider downsizing, which may include selling certain assets. Develop a relationship with a business banker from a local bank. That business banker can help you map out a step-by-step course of action to raise cash, hold you accountable to your plan and prevent you from migrating back to your old ways. If interim or permanent financing is needed, the business banker can help you navigate and sort through the various loan options that became available during this pandemic. Individuals or families should consider adjusting their lifestyle, which may include disposing excess personal assets. They should also develop a relationship with a personal banking officer from a local bank.
A positive ending to COVID-19 economic shutdown
In the future, I believe this economic time period will be summarized as follows: The United States entered a formal recession in 2020 which lasted into the latter half of 2021. This recession was unlike other recessions. The immediate cause of the recession was a temporary loss of consumer and business confidence as a result of the 2020 COVID-19 economic shutdown. Business owners and individuals adjusted their business models and personal lifestyles to survive and accumulate cash in preparation for measured future growth and to survive the next economic challenge that was guaranteed to happen.