At a recent seminar, the topic of liquidity, or cash on hand, came up as an important tool that a business should have at their disposal. It may be true in other regions, but specifically in Lancaster County, there is a culture of paying debt off quickly, at the expense of having liquidity available. The debate goes, “Why pay interest expense on debt while earning a lower rate than that on our deposits.” This argument doesn’t take into the account the importance of the flexibility that having cash on hand provides. It is easy to lose sight of that – until it’s needed.
An example of a business that focuses on maintaining liquidity despite carry debt is Apple, one of the most respected companies in the world. They are an extreme example as their numbers are very large, but let’s use them anyway. At December 31, 2019 they reported current cash, cash equivalents and marketable securities on their balance sheet of $107 billion dollars (plus another $100 billion in non-current marketable securities). Their cash holdings over the past few years has been widely known and talked about.
What has not been talked about as much is their term debt which as of December 31, 2019 was $103 billion. So why don’t they just take a big chunk of their cash and pay down debt? One of the reasons is that Apple understands the adage, “cash is king.” Having cash on hand gives Apple the flexibility to buy another company, invest in new products, or cushion a negative impact from an economic or production slow down. The latter came to light recently as they announced that revenue will be lower than expected due to production issues attributed to the Coronavirus. That cash buffer may come in handy as they have flexibility to adjust for unexpected circumstances. Without liquidity, a business can be caught in a jam when a crisis occurs and scrambling to find last-minute financing.
The road to building liquidity can be hard as a business is starting up or growing and reinvests its capital. It can be easier for a business that has reached maturity. Regardless of where your business is in its cycle, you should set liquidity goals. Remember, it’s a marathon not a sprint.
Keep in mind, while you might find estimates on the amount you should have in liquidity, every situation is different. Depending on your viewpoint and your situation, a line of credit can also be part of your strategy. Talk to your accountant, banking partner, and other financial advisors to help set those goals for your liquidity levels. The team at Univest is here to help, contact us at 877-723-5571.
Univest Bank and Trust Co. is an Equal Opportunity and SBA Preferred Lender.