The Role of Cash Reserves in Economic Downturns

A stellar product, superior marketing strategies, and an elite sales team are the primary engines of business success during prosperous times. These components drive growth and scale when the economy is booming, but when the economy turns sour these factors are often not enough.

Businesses with robust cash reserves have the tools to not only survive trying economic times but thrive and even expand during them. The following rationale will explain the ways in which robust, well-structured cash help businesses remain resilient during the most difficult times.

Cash Allows “Business as Usual” During Periods of Lower Revenue

The most immediate effect of an economic downturn is a drop in sales across most industries. Businesses with insufficient cash to weather this change face cashflow issues that threaten their solvency and reputation. Conversely, companies with robust reserves can maintain “business as usual” until the economy recovers and their revenue returns to normal levels.

Maintaining Staff and Operations

When faced with slower sales, many businesses are forced to cut staff, product lines, or both. They may also reduce marketing budgets and sales efforts in order to manage costs, and these actions can hamper plans for the future. However, companies with ample cash reserves don’t need to resort to these extremes. They can rely on their safety net to survive tough times while competitors struggle.

Navigating Tighter Credit Requirements

Banks and lenders often tighten credit requirements during periods of economic stress, making it more difficult to acquire financing to fund day-to-day operations or expansion. Fortunately, businesses with ample cash reserves are often more likely to be approved for loans under these tighter requirements. These companies also have the option to self-fund projects using the cash they’ve kept on hand, which provides another avenue to strengthen the business during trying times.

In short, cash reserves are the key to staying afloat and maintaining operations during a recession. Some businesses even find that their cash is the catalyst for turning a recession into an opportunity for expansion.

Reserves Allow Businesses to Expand During Recessions

Beyond simply surviving an economic downturn, ample cash reserves can help a business grow during a recession. Cash-rich companies can often take advantage of difficult economic situations and grow their market share while cutting costs.

Recessions Often Mean Cheaper Assets

Economic downturns inevitably put some companies in turmoil or even out of business, leaving the option for other firms to buy these struggling competitors at a discount. Other, more stable firms may be forced to sell equipment, assets, or lay off top talent to generate cash. These situations create opportunities for stronger companies to acquire assets at a discount, strengthening their position for the next growth cycle.

Cash Improves Negotiating Power

In a tight economy, cash provides leverage when negotiating with vendors and partners. A company with ample reserves can negotiate better deals with suppliers who are eager for the certainty of immediate payment. This potential reduction in costs further widens the gap between liquid and illiquid companies.

Through strategic acquisitions and negotiations, companies with ample reserves can emerge from a recession in a stronger position. However, this victory requires careful planning during prosperous times and ongoing management of reserve funds.

The Mechanics of a Resilient Reserve Fund

To build a resilient reserve fund, most businesses need at least two distinct “piles” of cash – a short-term safety net and a longer-term protection account. These distinct types of cash are generally invested in different products to maximize their utility.

Short-term cash reserves should remain liquid, since they could be needed on short notice to make payroll or pay vendors. A money market deposit account is a popular choice for this type of cash since it generally allows a simple transfer to a spending account.

Longer-term cash reserves are often invested in Certificates of Deposit [CDs] to capture higher rates of return. These funds are necessary to survive a long economic recovery but are generally not needed on an emergency basis. CDs allow the funds to earn a steady, predictable amount of interest that is locked in for the term of the investment. Further, a CD ladder strategy enables businesses to schedule liquidity that meets their projected needs while improving the overall rate of return on these longer-term cash reserves.

Deposit Insurance Limitations Are an Obstacle in Business Cash Management

The primary issue that most businesses encounter when investing cash is the limit on government insurance from the FDIC or NCUA. This coverage is limited to $250,000 per account ownership category at each insured financial institution. Therefore, a business with both short-term funds and CDs at a bank or credit union can leave millions unprotected.

Because bank failures are much more prominent during bouts of economic turmoil, an economic downturn is a particularly dangerous time for cash reserves. Fortunately, modern technology has offered a solution to protect large sums of cash with a single deposit, so businesses can remain resilient throughout any economic condition.

Protect Business Cash With ADM

At American Deposit Management, patent-pending technology powers our modern cash solutions that provide access to extended government protection. We can spread millions in business cash across our network of banks and credit unions, which enables access to unlimited FDIC or NCUA insurance.

Along with access to extended safety, our solutions provide liquidity to match virtually any need. Our liquid accounts offer next-day access to cash, and our term accounts provide a wide variety of CDs for laddering. As an added bonus, the banks and credit unions in our network compete for deposits, offering exclusive interest rates that often vastly exceed national averages.

Contact us today to learn more and get started.