Financial agility has the assets on hand to move fast. The absence of visibility into financial assets puts many organizations at a competitive disadvantage, leads to missed opportunities, and increases unnecessary risk.
The loss of control and opportunity comes at an especially bad time, as many businesses are transitioning from crisis management to recovery mode. This is where good liquidity management can help. The appropriate plan will give the right amount of capital at the right moment. And, when supported by smart technology, liquidity management draws on complete, real-time financial data from across the firm to inform faster, better business choices.
Liquidity management is each firm’s method to optimize, maximize, and protect its liquidity. Excellent liquidity management is distinguished by complete insight into spend, cash, liabilities, and financial resources – not simply the overall financial picture. Finance teams must see every transaction and cash flow, every law that affects financial obligations, and every supplier payment to make the correct decisions at the appropriate time.
Companies at various stages of financial maturity use various liquidity management tactics. Liquidity management is frequently used to access readily available capital in the early phases of maturity. These liquid assets can subsequently be utilized for various objectives, including paying for products or services, meeting debt commitments, or making short-term investments. Finance professionals also examine a balance sheet and convert funds locked up in one area to a more critical, time-sensitive demand, such as day-to-day operations.
Complete visibility of financial data is also important in preserving liquidity. AI-powered insights can be used in liquidity management tactics such as cash forecasting and scenario analysis. Treasurers will also find it easier to create in-house banking at their organization, which avoids higher borrowing rates and foreign exchange exposure.
Liquidity risk management also plays a significant part in supply chain management. Liquid management is more important than ever, given the supply chain volatility caused by the COVID-19 epidemic and the ongoing war between Russia and Ukraine.
What are liquidity risks?
Liquidity risks are areas of financial vulnerability within a company. Companies may need a sound strategy for both cash flow and liquidity risk management. Among the most frequent liquidity risks are:
Inability to Secure Financing: Late debt repayments or inability to follow loan agreement restrictions can make it difficult for businesses to secure additional financing. Businesses must maintain good lender connections, align assets to debt maturity profiles, and have solid capital structure management. Failure to get funding at reasonable rates might become a major liquidity risk.
Unplanned Capital Expenditures: Capital-intensive organizations are frequently highly indebted, with steep fixed-to-variable cost ratios. An unanticipated capital investment, such as the requirement for new equipment, might exacerbate current budget difficulties in such organizations. These limits can exacerbate liquidity risk.
Poor Cash Flow Management: Cash flow management assists a business in understanding potential liquidity possibilities and constraints. Because cash is still king, a positive cash flow is required. Without a healthy, robust, and consistent strategy for cash flow, your firm will face ongoing liquidity risk, making it impossible to acquire loans, attract investors, or remain viable long-term.
Profit Crises: A business in a profit crisis will face diminishing profit margins and revenue. During these situations, a company’s cash reserves are frequently depleted. While this is a good short-term alternative, a company that depletes its cash reserves may be in a liquidity crisis.
Companies with an efficient liquidity management plan can better manage unexpected turns and survive crises.
Here’s how a bank can help with liquidity management:
- Digitize your payment, collection, and reconciliation operations.
- Increase surplus cash using a variety of global liquidity options.
- With our working capital advising service, you may improve your cash flow.
- Using our Treasury Prism analytics tool, you can gain insights to optimize your cash situation.
- Using API solutions, develop digital solutions to address pain points.
Table of Contents