Navigating Turbulence: Cash Management and Banking Relationships in an Uncertain Economy

A new economic reality

The world in which your company operates has fundamentally changed. We have faced several crises in recent years. Geopolitical tensions, wars and disrupted supply chains have made commodity prices and energy costs volatile. For your business, this doesn't necessarily mean that customers stay away – but it does mean that your costs go up, your margins shrink, and your cash position comes under pressure. Proactive cash flow management is therefore essential for business continuity.

Cash flow management in volatile times

The importance of cash flow forecasting in times of working capital under pressure

Working capital is the set of short-term assets and liabilities that are needed to keep day-to-day business operations running. It shows how much money is tied up in stocks, outstanding receivables from customers, and payment terms to suppliers.

The current economic context with rising commodity prices means higher inventories for many. In addition, extra stock is often built up for safety reasons in order to deal with logistical malfunctions. As a result, more capital is tied up in working capital than usual, which can put pressure on your cash position.

In addition, we have noticed that some customers are slower to meet their payment obligations as a result of the aforementioned economic conditions. In addition, we see a clear increase in the number of bankruptcies.

Making a cash flow forecast on a weekly or monthly basis, possibly combined with scenario analyses, gives you insight into possible risks and opportunities in the coming weeks and months. To measure is to know, which allows a company to act in a timely and effective manner.

Refinancing capacity and real estate

Real estate as a strategic source of financing

In addition to working capital optimisation, there is another way to strengthen your liquidity: your real estate. After all, in uncertain economic times, banks look for certainty.

Many SMEs have real estate that has only a limited debt over the years, or is even completely debt-free.

Your business premises, warehouse, land or office are an attractive security for banks. This makes it a strategic source of funding that many SMEs leave underutilized.

By re-lending your real estate (taking out a mortgage or extending it), you as an entrepreneur can get extra money in uncertain periods, which you only have to pay back over a relatively long term.

The basis for a refinancing is the valuation of the property, in order to determine the current market value.

Afterwards, the maximum loan value can be determined – usually 60 to 70% of the market value, depending on location and type – and, after deduction of any outstanding debts on the property, the total 'free space' can be determined.

An alternative way to obtain additional liquidity in the short term is a 'sale & lease back' of your real estate assets, whether or not in combination with a leasehold structure, in order to further optimise the financing capacity and taxation. Land, which cannot be depreciated, can still be 'fiscalised' by means of the aforementioned financing structure.

Obviously, when setting up such a financing construction, sufficient attention must be paid to the impact of any VAT regularisation, the capital gains tax and the registration fees to be paid. 

Optimization and diversification of funding sources

Many SMEs work with one bank, which can be risky, especially in uncertain times. Diversifying your sources of financing ensures better risk diversification and multiple interlocutors.

Factoring: You sell your outstanding receivables (money that customers owe you) to a factoring company. You will receive this money immediately, minus a fee. In addition, you can transfer the risk of customers not paying to the factoring company (non-recourse factoring).

Supply Chain Financing: A third party pays your suppliers directly. You pay this third party later, with a small fee. This will give you more time to pay.

Borrowing base financing: A form of credit in which the maximum borrowing capacity is determined on the basis of the value of specific assets that serve as collateral. This form of financing often translates into a working capital line for the available stock. 

Renting: Instead of buying equipment or vehicles, you can rent them (off-balance sheet lease). This gives flexibility and can relieve your balance sheet. An alternative is an on-balance lease.

Mezzanine financing: A somewhat more expensive form of financing, which can however be an addition to traditional bank financing and can therefore enable you as an entrepreneur to obtain a higher financing rate. After all, this form of financing is subordinated to the bank.

Optimization of banking relationships

Communicate regularly (monthly or quarterly) with your bank about your financial situation and cash flow expectations. This ensures transparency. After all, a good contact with your relationship manager and therefore a strong relationship with your bank can be crucial in somewhat more difficult times. Banks are often more flexible in dealing with certain conditions (covenants) in trust mode.

Be prepared

‘Cash Is King’

Entrepreneurs who manage their cash flows well, evaluate their refinancing capacity, and maintain their banking relationships are better prepared for uncertain times. They are ways to make your business stronger, more flexible and more resilient.