Years ago when I worked in banking, one of my earliest critical lessons completely upended my understanding of cash as an asset. The treasurer of the bank was unhappy with the way that the retail team was monitoring the level of cash sitting in the bank’s network at the cashier tills, in the branch vaults and in the ATMs. The treasurer was rightly pointing at that by having physical cash in excess, the bank was holding a dead asset that could otherwise be appropriately sweated in overnight lending or in short term government securities. The excess cash holding was actually a liability from a revenue generating perspective. The discussion then led to a debate about which branches had high cash deposit and withdrawal customer trends and what kind of daily monitoring was ongoing that would ensure the bank was not leaving money on the table as it were.

As I sat in the parking lot at my daughter’s school last week, I watched one of the school’s handymen going about his business fixing a pipe coming out of the kitchen. I recalled a vicious debate on a parent’s WhatsApp group at the onset of the pandemic when some parents were angry at the school’s partial reduction of school fees as it moved towards providing an online platform for the continued education of its students. In those parents’ view, the school fees should have been significantly whittled down since the children were not physically present at the school premises. Discussions between parent representatives and the school had revealed that the school had fixed costs like salaries, loan repayments and building maintenance that continued to accrue even where the students were not present.

But a few belligerent parents were not convinced, partly I presume because they were already suffering reduced incomes themselves and were in survival mode just like many organizations were. The school by this time had made the painful decision, like many other businesses, to drastically reduce salaries of staff with the non-teaching staff like the maintenance guys and bus drivers having to take massive cuts as their labor was not required on a day to day basis. For many parents, the pandemic brought to fore the fact that their school fees payments was what kept the business of the school afloat, where that business went beyond just the teacher-child interaction in class and extended to all the non-teaching staff, the facilities, the buses and everything else within the school universe. The popular buzz word in many organizations at the beginning of the pandemic became “runway”: Do we have enough runway to keep this organization afloat for the unforeseeable future? In other words, does the organization have enough cash, and for how long could the monthly cash burn last with significantly reduced revenue?

What the pandemic did was lift up the skirts and reveal the spindly cash flow legs of many a business. The cash conversion cycle was tight, with revenues being gobbled up quickly in payment of suppliers and salaries, leaving little wiggle room for free cash to be set aside in reserves for a rainy day, or as in this case, a pandemic and its debilitating lock down measures. Years ago, a banking colleague humorously told us a story of a visit she made to a well-known advertising agency where she had a difficult discussion with the founder, telling him that he could not read an income statement and  know the difference between revenue and profit. The founder constantly took money out of the business to plough into personal pursuits and the organization was suffering from huge cash flow difficulties. Within a year of that discussion, the agency folded up and the founder went into his next business venture: politics.

Cash reserves for many businesses are an aspiration given rising costs, competition and thin profit margins.  Just like in the banking industry, idle cash is a liability and is best applied sweating it out either in finished goods or along the service value chain to generate more revenue. But as the Covid-19 pandemic has shown us, having cash reserves is a necessity particularly when it comes to the core of our businesses which is employee welfare. The social contract between employer and employee has been severely tested in the last year particularly as business owners face the diabolical conundrum of whether to lay off or slash wages of employees so as to ensure a longer business survival runway, or keep the employees with no pay reductions and pray that things will take a turn for the better in a very precarious and unforeseeable future. Top of our minds should be our look back reputation: what will employees and suppliers remember us for in years to come when they look back at the pandemic years?

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Twitter: @carolmusyoka