Measuring Recent Trends in Liquidity Management

By Kyriba Value Engineering Ron Stott

In the early days of the COVID-19 pandemic, companies rushed to increase liquidity. While most industries have returned to near pre-pandemic operations, Kyriba examined how liquidity levels have changed since the onset of the pandemic and the implications for CFOs and treasurers going forward.

Reviewing quarterly liquidity levels from December 2018 through December 2021, Kyriba found that most industries entered 2022 with more liquidity than they had prior to the pandemic. These organizations are, however, facing new challenges today that will likely result in consistently higher levels of enterprise liquidity. Why?

Liquidity Management Trends

As noted in Kyriba’s October 2022 Currency Impact Report, North American companies reported $34 billion in currency volatility impacts in Q2 2022, with an average earnings impact per share of 10 cents. With interest rates and inflation increasing, supply chain disruptions continuing and a global recession looming, companies are likely to maintain current liquidity levels and might even increase them further.

To measure how companies’ liquidity has changed since 2020 and to monitor corporate liquidity going forward, Kyriba Value Engineering began reviewing quarterly published financial reports. Kyriba reviewed publicly traded U.S. corporates with 2020 annual revenues of at least $1 billion. This criterion resulted in a sample size of about 1,300 companies.

Liquidity Trends by Industry

Kyriba found that liquidity increased across all sectors from 12/31/2019, the last quarter before the impact of COVID-19 occurred. All sectors’ increased liquidity in 2020, with most peaking in Q1 or Q2 of 2021. Whether their levels rose slightly or declined for the balance of 2021, in all cases they ended the year higher than at the end of 2020.

It has been widely documented that new corporate debt issuances were at record levels in 2020. 2021 was only slightly lower. Factors for this included the desire to obtain longer secured financing at historically low interest rates. All sectors remained above year-end 2019 liquidity levels at the end of 2021.

With interest rates rising sharply in 2022, net new borrowing declined sharply from the 2020-2021 levels. Through September 30, 2022, new issuances of corporate debt were down 27.8% year over year. Rising rates, as well as rising credit spreads, made borrowing more costly in 2022. With surging inflation, growing fears of a recession, continued supply chain issues, war and political uncertainty, many sectors are experiencing pressure on operating margins. These factors should continue to put pressure on higher corporate liquidity levels.

Total Debt by Industry Sector

As shown above, outstanding debt at the end of 2021 was higher in all sectors than at the end of 2019 except for energy, with most sector debt leveling off or declining from mid-2020 levels. The largest increases were in the consumer discretionary and industrial sectors.

Key Industries Building Liquidity

Kyriba analyzed industries that were cited in other publications as having the greatest need to build liquidity, as well as industries that saw a sharp increase in revenue. Auto manufacturers and airlines clearly have shown greater increases and remained at substantially higher levels through 2021 than the others.

Airlines, which experienced severely curtailed traffic in 2020, increased average liquidity from 75 days at the end of 2020 to a peak of 232 days at the end of Q1 2021 before falling sharply in the second half of 2021 to end the year at 176 days. This is still 100 days above pre-pandemic levels.

Auto manufacturers continued to increase liquidity in 2021 and ended the year at 171 days of liquidity, up sharply from 120 days at the end of Q3 2021. Supply chain issues in the automotive industry, caused by bottlenecks at ports and COVID-19 factory closures, continue to require some increased inventory to minimize disruptions in production. This ties up more cash in working capital, driving a need to raise liquidity to sustain operations.

Industries with

Industries that experienced a surge in demand early in the pandemic also increased liquidity at the beginning of Q1 2020, but mostly leveled off or declined thereafter. Clorox, in the first few quarters of the pandemic, saw quarterly demand for its products jump more than 20%. Its days of survival metric rose from the mid-80s prior to the pandemic to a peak of 127 days at the end of the first quarter 2021. This was largely caused by an accumulation of cash. As cash leveled off in 2021, its days of survival declined to 35 days, well below its pre-COVID average level.

Industries Positively Impacted by COVID-19 graphic

Online retailers, such as Amazon, benefitted from a surge in online purchases. Liquidity at Amazon was only slightly higher through 2020 and 2021 with both cash and debt increasing over the period.

Managing Liquidity in 2023

The risks CFOs face in 2023 are far different than those experienced through the worst days of the pandemic. The focus to maintain higher liquidity may shift to improving operational efficiency in cash management and cost efficiency in risk management and working capital management as CFOs face pressure on revenue, margins and higher debt and risk management cost. Proactive liquidity planning requires a unified and real-time approach that allows CFOs and finance to evaluate on-the-fly, multiple scenarios and adopt the right strategies to ensure optimal liquidity is available.