Liquidity Management – show me the money

| 31-01-2018 | treasuryXL |

Treasury is a function which entails many different roles and responsibilities. The main task is to monitor and manage the cash within a company ensuring there is sufficient liquidity. This means monitoring all the cash flows – both inflow and outflow, together with the sources of the flows – current operations, investments, borrowing etc. There must be enough liquidity to maintain the daily operations, whilst excess funds need to be invested. At the same time, Treasury must ensure that excess funds are invested in a safe and prudent manner and that future assets and liabilities are hedged where appropriate.

It has been said many times over – for a company cash can be compared to blood in the body or oil in an engine. Without it, a company ceases to be. When liquidity management is properly exercised, it allows a company to establish the maximum benefit from its cash flow, for the minimum of expenditure.

So, what happens to a company when liquidity management is not implemented?

  • Cash tied up in operational processes
  • Unable to define the bank balance
  • Difficulty in managing the existing bank accounts
  • Impossible to project cash flow forecasts accurately
  • Volatility in actual cash flow versus expected cash flow
  • Reconciliation is a time-consuming process
  • Inability to optimize the cash flow for working capital
  • Lack of agreed procedures for risk management, hedging policies and cash management
  • Banks are averse to lending the company money as there is a lack of control
  • Failure to comply with operational, accounting and governmental regulations
  • Difficulty in funding internal operations and investments

Advantages of liquidity management

  • Improved cash flow
  • Awareness of all bank balances
  • Ability to aggregate bank balances efficiently
  • Internal investment and funding operations for subsidiaries
  • Reduction in external borrowings
  • Faster payment of creditors
  • Optimization of working capital
  • Netting and cash concentrations can be applied
  • A heightened appreciation and recognition of cash within the company
  • Less reliance on short term external funding to meet day-to-day needs
  • Increase in profits
  • Increase in efficiency within the whole business cycle
  • Staff can devote more time to projects and procedures that have a higher value
  • Able to implement and monitor agreed risk policies

Designing and implementing liquidity management

  • Inspect and document existing procedures
  • Discover the short falls and dangers
  • Design specific procedures to enhance and capture the processes
  • Create an action plan and implement
  • Review constantly

Everything needs to be documented and signed off by the directors – it must be a policy. One of the greatest – if not the greatest – dangers for a company is not being able to forecast and maintain liquidity. However, in many companies the policy is only lightly enforced. Difficulties in forecasting cash flow are well known and documented, but the consequences are potentially very severe. It should be part of the monthly management reporting cycle and critically observed. Where necessary, actions need to be taken by the directors to ensure that the whole company is aware of the liquidity risks and procedures.

Next: Risk Management

Lionel Pavey


Lionel Pavey

Cash Management and Treasury Specialist