THE IMPORTANCE OF LIQUIDITY IN TIMES OF CRISIS

Perhaps the time has never been more opportune than this, in the face of the COVID-19 pandemic, to discuss the importance of Managing a Company's Liquid Resources (Cash). For Companies with a high level of Management and Corporate Governance, the management of Caixa is under the responsibility of the Treasury department, however, since in Brazil most businesses are represented by Micro and Small Enterprises (SMEs), especially with family management and low management maturity, it is unlikely that these Companies have any exclusive area for that purpose.

Source: IBGE, considering, therefore, that this management is carried out mainly by Entrepreneurs, it is important that they know how to distinguish the Legal Entity (Company) from the Individual (Partner). According to a survey conducted by the Credit Protection Service (SPC), 22% of Micro and Small Entrepreneurs manage the Company's Cash and personal finances together, and this confusion becomes an even greater problem when the economy declines, like the current one. As already explored in the article THE IMPORTANCE OF CASH FLOW MANAGEMENT, it is appropriate for Entrepreneurs to pragmatically monitor the Inflows and Outflows of short-term resources, as well as to develop Cash Flow projections, with stress scenarios, seeking predictability. It so happens that, in most cases, every time Companies generate more cash than expected, the amount is distributed the next moment without any adequate planning. It is also common to see them resort to financing lines with high interest rates to remedy short-term obligations due to Caixa's mismanagement. The article BURNING CASH AND ITS RELEVANCE IN SMALL BUSINESSES clearly presents how the cash flow cycles of various businesses, from the food sector to the IT sector, work. On average, Companies have 27 cash days to honor their obligations without any revenue occurring. Thus, if they always operate within the limit of these 27 days, without any cash management, any deviation from the Budget (whether from Revenue or Cost) may mean the bankruptcy of the business. Liquid Resources management has different objectives, with the focal point being the efficient allocation of resources, obtaining better results, generating operating profits and increasing equity. This management can be divided into three pillars:1) Financing: Searching for financing alternatives is common to all businesses, especially in times of expansion or crisis. Taking credit is often the only alternative to help businesses grow, whether for the acquisition of new inputs, equipment or even the maintenance of Working Capital. Several Financial Institutions, especially Development Banks (BNDES, BDMG, DesSP, etc.), provide specific lines in their Hall of products, with rates and deadlines that are more attractive than those common on the market. Examples: Civil Construction, IT, Agro and Health are sectors with specific lines.2) Cash Balance Application: Companies are created to generate Profit, monetize allocated capital, and return to Entrepreneurs in the form of Profit Distribution. However, it is not possible to admit that every additional resource generated by the Company is a possible compensation. Allocating part of the Net Resources (cash) to a financial investment can help the Company in times of Crisis, such as the current one. Therefore, it is recommended that the Entrepreneur exercise restraint when distributing their Profits, having enough to withstand some deviations in the Budget, and not have to resort to short-term financing with high interest rates. At this point, it is up to the Entrepreneur to understand exactly how the Company's Cash Flow behaves, applying the resource to products with adequate liquidity. If short-term resources are needed, the Entrepreneur will need to invest in an alternative with a lower income, but which offers the possibility of immediate redemption. In this regard, Strategic Planning should serve as a guide to know what products to apply to.3) Risk Protection: There's no way to foresee all the threats inherent to the business. There are endogenous factors that can be mitigated following good Strategic Planning, and exogenous factors that can be avoided, but their occurrence is not foreseen. Companies are exposed to various risks such as credit, market, exchange rates, etc. However, a Pandemic Crisis, such as the current one, is treated as a Black Swan (an unpredictable event that is beyond what is normally expected of a situation and has potentially serious consequences). In these moments of low market liquidity and low demand/consumption, the Entrepreneur must have the agility to protect their business, so that it does not reach a point of no return, such as bankruptcy. In times of crisis like this, even the most conservative Entrepreneurs must be open to raising funds with third parties. Several lines are currently being made available by Public and Private Banks, with extremely attractive rates and deadlines. The availability of this resource, even though its use is still uncertain, may be the difference between stagnation and rapid growth after the period of instability. ARTICLE WRITTEN BY HENRIQUE PORTO — PARTNER OF FC PARTNERSGo to our site: http://www.fcpartners.com.br