Cash flow is the lifeblood of an organization. It’s the fuel that keeps operations afloat and propels an organization’s growth.
But managing liquidity effectively can be a big challenge for cash managers, especially in these turbulent economic times. So, how can a cash manager take their liquidity management from good to great? This article reveals five cash flow strategies that can optimize liquidity management.
Keeping the Cash Flowing
In most organizations, cash managers are responsible for managing cash reserves to maximize returns and ensure that the organization has enough cash on hand to meet its financial obligations.
The stakes are high for cash managers to get liquidity management right. A cash shortfall can result in debilitating supply chain issues caused by late payments to vendors, defaults on an organization’s loan or debt payments, and missed opportunities to take advantage of lucrative investments.
Not surprisingly liquidity management can be a major source of stress for cash managers.
Top Five Liquidity Management Challenges
Several common barriers stand in the way of optimizing liquidity management.
- Poor visibility. When it comes to assessing value, executing transactions, and forecasting cash flows, many cash managers don’t have ready access to the accurate information that they need. This is especially true of illiquid assets. The root of the problem is that cash and investment data and other information is siloed across platforms and institutions. As a result, staff waste countless hours wrangling spreadsheets to aggregate and analyze fragmented data.
- Settlement delays. It can take days or even weeks for transactions to settle using traditional mechanisms. Delays in cash settlements can complicate liquidity predictions and potentially create cash flow issues. Until real-time cash settlements are widely available and affordable, cash managers will be challenged with processing settlements as efficiently as possible.
- Risk aversion. No cash manager wants a cash shortfall on their watch. This fear can result in cash managers over-accumulating liquid assets at the expense of potential returns on these investments, or being reluctant to sell assets at a loss, even when it would optimize liquidity.
- Technology limitations. Many legacy treasury and cash management systems weren’t designed to manage liquidity in real-time or to provide the data analytics that today’s cash managers need. Other systems cannot aggregate cash and investment data in a single place.
- Regulatory complexity. From Know Your Customer (KYC) to Anti-Money Laundering (AML) requirements, complying with the various regulations governing different types of assets and transactions can complicate liquidity management and slow down transactions.
Navigating the fluctuating economy and the increasingly interconnected global business landscape will require cash managers to find ways to overcome these barriers to optimizing liquidity.
Five Strategies For Optimizing Liquidity
- Centralize visibility and control. Informed decision-making on funds flows and cash allocation starts with having real-time data on all cash and investments in one place. Look for a cloud-based solution that connects to as many financial institutions as possible, makes it easy to create, view, and share timely, customized reports, has tools for uncovering and reallocating underutilized funds, offers configurable workflows for routing reports.
- Forecast with precision. Cash managers don’t have to be sold on the importance of accurately predicting incoming and outgoing cash flows. The question on the minds of many cash managers is how to do it. After all, cash flows can be unpredictable. Here are some suggestions. First, leverage artificial intelligence (AI) to analyze cash flow data and provide predictive insights. AI-powered tools also make it easy to project multiple scenarios to help uncover potential opportunities and risks. Second, ensure that your forecasts capture all inflows and outflows. Third, compare actual results with forecasts to identify the cause of discrepancies. Finally, regularly update cash forecasts to reflect changing circumstances.
- Eliminate AR friction. Inefficiencies in delivering invoices or applying customer payments can slow cash flows down and make it hard to know where things stand. Streamlining and optimizing processes related to invoicing, payment collection, and account receivable (AR) management can help improve liquidity in several ways. Electronically delivering invoices to customers eliminates the delays associated with the U.S. Postal Service and possibility of lost invoices. Online portals make it easy for customers to pay their open invoices. And AI-powered receivables solutions reduce unapplied cash. Some AR automation solutions also predict when a customer’s payment will be received, based on past payment behavior.
- Strike the right balance. Minimizing risk and maximizing returns isn’t easy. But there are several steps that cash managers can take to strike the right balance between risk and return. For starters, cash managers should diversify their portfolio to include a mix of assets with different risk and return characteristics. Consider dividing investments among different asset classes, such as stocks, bonds, and cash, based on your organization’s goals, risk tolerance, and time horizon. Carefully consider the size of each position in your portfolio, based on the risks. And remember that there is no one-size-fits-all approach to balancing risk and return. Cash managers must tailor their strategy to their organization’s needs and situation.
- Collaborate. Cash managers don’t have to go it alone when it comes to optimizing liquidity. An organization’s financial partners, suppliers, and customers can play a big role. Look into supply chain financing, early payment discounts, trade credit, or barter arrangements. Consider introducing new payment terms to encourage faster cash collection or revising payment terms after consulting with customers who have large outstanding payables.
These strategies will help cash managers optimize their organization’s liquidity.
Optimize Your Liquidity
Optimizing liquidity is critical to reducing the risk of financial distress and enhancing profitability. By overcoming the barriers to liquidity management, cash managers will sleep better knowing that their organization is set up for success and can more easily navigate inevitable market turbulence.
