April 20, 2020
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. In other words, liquidity is the ease of converting an asset into cash (Investopedia). Liquidity is important to a business, especially in a time of crisis. No one expected a pandemic like the coronavirus (COVID-19) to have such a large impact on the U.S. economy. Contractors with a financial plan to handle a crisis will fare better than those without one. What contractors have all learned from this experience is that one thing can quickly change the course of the future.
Contractors that are highly liquid have a better chance of managing the financial constraints of this pandemic than those that are not. They will be able to turn their assets into cash faster for their true value. Low liquidity assets may be harder to sell for their true values. Most common examples of liquid assets are cash, certificate of deposits, marketable securities, short term loans, accounts receivables, bills receivables, stock, government bonds, and promissory notes. Non-liquid assets include real estate, materials, equipment, collectibles, and retirement accounts.
A company's liquidity indicates its ability to pay debt obligations, or meet current liabilities, without having to raise external capital or take out loans. High liquidity means that a company can easily meet its short-term debts. Low liquidity implies the opposite. The stability and financial health, or lack thereof, of a company and its ability to pay off debt is of great importance to lenders, sureties, creditors, and investors. Companies with low liquidity face severe challenges to their future if they do not act. These contractors may not qualify for a commercial loan, bonding, or other types of financing needed to continue operations. Companies with low liquidity are not able to face a problematic situation and especially not a pandemic like COVID-19.
There are several steps that a contractor can take to ensure that they are in the position to continue operating during challenging times, and some of these practices should continue once normal operations are restored. These include:
- Run “what if” scenarios and cash flow forecasts to see which projects will have the greatest impact on working capital.
- Project what will happen if a job site gets shut down to protect workers.
- Analyze the impact of legislation such as the Families First Coronavirus Response Act (FFCRA H.R. 6201).
- Take advantage of federal and state programs to gain access to cash.
- Communicate with employees about what is being done and why.
- Communicate with suppliers and renegotiate contract and payment terms.
- Be transparent with stakeholders.
- Talk with lenders, landlords, utility companies, and others about deferring payments if necessary.
- Remain positive. COVID-19 will pass.
- Keep in mind that everyone and everything is being impacted by COVID-19.
We will continue to update you on the federal, state, and local government’s response to COVID-19 as we learn new developments.
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at
Richard.Higgins@MCC-CPAs.com
. I can be reached at
Marty.McCarthy@MCC-CPAs.com
. As always, we are happy to help.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
