For many businesses, the past two years were the most difficult in recent memory. Managing cash flow required increased discipline and creativity, thanks to the COVID-19 pandemic’s resulting lockdowns, supply chain challenges, and shifts in consumer behavior. However, some companies are mastering cash flow management – even modeling best practices – and are optimistic about the year’s potential.

A survey of 1,700 chief executives revealed 81% have a somewhat or very favorable business outlook for 2022.1 This attitude likely reflects positive business performance in 2021, despite challenges. Thirty-seven percent of surveyed executives reported revenue increases of 20% or more during 2021.2

Executives who made changes during the pandemic were rewarded with long-term opportunities. Some companies quickly pivoted to new business models (e.g., restaurants and retailers that offered curbside pickup), products, or services. Still others were able to successfully manage limited supply chains, staff, and demand. The crisis created a perfect storm for video conferencing and streaming services, enabling providers to quickly react to home entertainment and remote work needs.

Businesses successfully managed cash flow in 2021.

In mid-2021, the working capital opportunity for U.S. businesses was $1.29 trillion, with the bulk of cash tied up in accounts payable and inventory.3

While there is still much work to be done, most of the top 1,000 publicly traded non-financial firms were successful in managing cash flow and its contributing factors. To improve liquidity, some companies increased cash on hand, while others used available cash to reduce debt. Other tactics included using excess inventory or increasing inventory to meet current demand, while tightly controlling material costs.4 Strategies varied by industry and some were more successful than others. But by the end of 2021, market leaders were well-positioned to move forward (see Figure 2).

Inflation is testing businesses in 2022.

At more than seven percent (7.87%), the U.S. inflation rate is higher than it’s been in 40 years. Seventy-seven percent of chief executives fear it will impact their businesses this year and are developing strategies to counter its effects.5

Inflation will continue to put pressure on revenue, profit margins, expenses, and everything in between. Business leaders will have to continue to find ways to mitigate its effects. It is important to carefully monitor payables and receivables to better understand what is owed, what is due, and how liquidity will be impacted.

Where are businesses turning for cash?

A memorable character in a well-known movie told his sports agent to “Show me the money!” That’s the theme for businesses this year as they continue to assess revenue and liquidity risks and consider how to shore up capital.

With pandemic-related government assistance drying up, businesses must seek other options to fund daily operations, growth, and expansion. These might include:

• Loans
  Despite higher interest rates, banks reported an increase in commercial and industrial loans through the end of 2021 and beginning of 2022.6As business leaders look to move their companies forward in an uncertain economic environment, the ability to borrow from trusted lenders will be increasingly important.
   
• Corporate Bonds
  Corporate bonds enable investors to lend to companies with interest due at a set time. High-yield corporate bond issuance totaled $622 billion last year – 60% higher than before the pandemic. Companies used proceeds to restructure debt, as well as for mergers and acquisitions.7
   
• Equity Capital
  Companies may also sell shares to raise money for operations, purchases, and other needs, without creating debt. The market is ripe for equity financing. Venture capitalists invested $612 billion last year – up 108% from 2020.8 Similarly, investors contributed $900 billion to exchange traded and long-only funds in 2021.9

Choosing the right capital solution requires a realistic evaluation of capacity to repay, risk tolerance, business structure, and long-term goals – to name a few.