Learn how to protect your cash flows from a recession and how a cash management system can help the global recession in 2022.
From 1854 to the most recent recession in 2020, the United States has experienced 34 recessions, according to the NBER. The International Monetary Fund (IMF) predicted the US economy might face a second-quarter global recession in 2022.
The impacts could be minor, like limited resources, or significant, like declaring bankruptcy, depending on the size and type of organization. In either scenario, companies will likely face tighter credit limitations, liquidity issues (such as slower accounts receivable), and debt restructuring. Generally, firms of any size may find it difficult to endure a recession if they have little or no access to financial reserves or assets.
Treasury risk during a global recession includes the following:
Throughout a recession, interest rates go through several stages of growth and decline. The Fed typically raise interest rates during high economic activity and spending to close the supply-demand gap. As a result, spending and purchasing are reduced, which progressively triggers a recession. To stimulate the economy during a recession, the government reduces interest rates. As a result, businesses frequently predict this time of shifting interest rates to monitor their cash flows and prevent cash shortages.
High cash buffers act as financial cushions for organizations and can be used in times of distress. However, a high cash buffer is not always great as it may signify that not enough money is being invested back into the company. When estimates are wrong, companies increase their cash buffers because they are not well prepared for macro-level fluctuations due to manual reports being dead on arrival.
Insufficient cash reserves and projections frequently cause the bankruptcy of start-ups and SMEs. Many small and medium-sized businesses (SMEs) are forced to close their doors due to poor cash flow management. Cash management becomes even more crucial during a recession, and applying caution may help a company survive a tough economic period.
Some of the reasons why companies should focus on cash management during a global recession are:
The following are the top advantages of using a cash management system:
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