Liquidity management services: What are these, and why are these tools important?

A healthy liquidity position helps businesses survive in the dynamic economic and business landscape. One of the ways to make adequate use of liquidity is to use effective liquidity management tools.

Liquidity management is the process of planning and managing a business's cash flow and liquidity. Additionally, liquidity management tools ensure they meet short-term debt obligations while simultaneously seizing growth opportunities.

What are liquidity management tools?

Insufficient liquidity can have consequences for the stability of operations, lead to missed growth opportunities, and potential insolvency. Liquidity management tools are strategies and software that help companies manage cash flow and ensure they have enough liquidity to meet their financial obligations.

Companies use spreadsheet software such as Microsoft Excel or Google Sheets to record account transactions. However, this process can be tedious, time-consuming, and prone to errors, discouraging adequate use of liquidity. Plus, it is hard to keep this data up-to-date.

A better way to make adequate use of liquidity and to monitor liquidity risks is to use dedicated liquidity management tools that help companies monitor

Some of the liquidity management tools available are:

• Cash flow forecasting is estimating future cash inflows and outflows based on historical data, current trends, and expected changes in the outside business environment. It helps you plan and avoid cash shortages or surpluses.

• Working capital management: It helps businesses manage short-term liabilities, such as inventory, short-term bank loans, and accounts receivable and payable. It ensures businesses always have enough cash to pay bills on time but not enough that it is left idle — this helps businesses maintain a healthy balance between liquidity and profitability.

• Liquidity management software: By leveraging liquidity management software, companies can automate and streamline their processes. This software can provide real-time cash flow visibility, scenario analysis, cash pooling, forecasting, reporting, and analytics.

The role of liquidity management services

The role of liquidity management services is to help you improve cash flow and liquidity performance. They serve the following purposes:

• Manage their liquidity risks and optimize their cash allocation and investment strategies.

• Gain real-time visibility into their cash positions and balances across multiple bank accounts and currencies.

• Forecast their net inflows and outflows based on historical data, current trends, and future scenarios.

Key features and functionality of liquidity management solutions

Liquidity management solutions can connect to the company's bank accounts, automatically retrieve the transactions from there and update the cash flow planning based on the latest data.

They can also provide features such as the following:

Real-time liquidity monitoring

Liquidity management tools allow you to access cash positions and balances across multiple bank accounts and currencies in real-time. It helps users track their cash flows, identify liquidity gaps or surpluses, and take appropriate actions to optimise their liquidity.

Real-time liquidity monitoring can also provide alerts and notifications for any significant changes or anomalies in the cash flow data.

Cash position and forecasting analysis

It enables you to create and update cash flow forecasts based on historical data, current trends, and future scenarios. It helps you plan for cash needs, anticipate potential liquidity risks or opportunities, and evaluate the impact of different business decisions on your cash flow.

Cash position and forecasting analysis can also support users to compare their actual cash flow performance with their budgeted or projected figures and identify variances or deviations.

Risk scenario modeling

This feature allows you to simulate various risk scenarios and stress tests on your cash flow and liquidity. It helps users to assess the resilience of their liquidity management strategy under different market conditions.

Risk scenario modeling can also help you measure and manage liquidity risk exposure and develop contingency plans for mitigating adverse effects.

Integration with banking and financial systems

You can connect your liquidity management solution to your bank account and other financial systems. It helps you automate the data collection process, reduce manual errors, and enhance the accuracy of your cash flow data.

Integration with financial systems can also facilitate the execution of various liquidity management transactions, such as sweeping, pooling, investing, or borrowing funds.

Liquidity reporting and compliance features

This feature allows you to generate and customize various reports and dashboards for your liquidity management activities. It helps users monitor and measure their liquidity performance, track key performance indicators, and analyze their cash flow trends and patterns.

It can also help companies meet various compliance requirements, such as those set out by the Financial Reporting Council (FRC).

Advantages of liquidity management tools

Application of liquidity management is beneficial due to the following advantages provided by such tools:

Enhanced decision-making and risk mitigation

Liquidity management tools can help you make better and faster decisions based on real-time and accurate data.

They can help you identify and mitigate liquidity risks, such as cash shortages, currency fluctuations, or market shocks, by providing scenario analysis, stress testing, and contingency planning features.

Improved cash flow visibility and accuracy

Liquidity management tools can help you gain a clear and comprehensive view of your cash positions and balances across multiple bank accounts and currencies.

Optimized working capital management

Liquidity management tools can also help you optimize your working capital management by enabling you to allocate and invest cash efficiently and effectively.

They can also help you reduce interest costs and enhance returns by providing optimisation and investment solutions.

Regulatory compliance and reporting efficiency

Liquidity management tools can help businesses comply with regulatory requirements by providing relevant data and documentation.

They can also help users generate and customize various reports and dashboards for liquidity management activities, which enhances reporting efficiency and transparency.

Cost reduction and operational streamlining

These tools help reduce operational costs by eliminating paper-based or manual processes or multiple systems.

They can also help you streamline operational processes by facilitating the execution of various liquidity management transactions.

How do we develop a comprehensive liquidity management strategy?

An optimized liquidity management strategy can help businesses maintain financial stability while ensuring it has sufficient funds to meet obligations. Here’s how you can develop a liquidity management strategy for your firm:

• Analyze and monitor cash flow: Examine the various sources of cash, such as sales, loans, and investments, and the uses of cash, such as taxes and working capital expenditures. Analyze the inflow and outflow and identify any potential cash flow issues so you can develop strategies to address them.

• Establish cash reserves: Having emergency cash reserves can help with a buffer of liquid funds that you can use to meet your short-term financial obligations or unexpected expenses. It can reduce reliance on external financing sources and enable you to exploit investment opportunities.

• Manage debt: Managing debt includes monitoring your debt levels and ensuring the loan amounts are used responsibly. Consider factors such as terms of loans, interest rates, and repayment schedules.

• Manage inventory levels: Avoid having too much inventory on hand since it can tie up the working capital that’s best used elsewhere. On the other hand, insufficient inventory could cause you to miss out on sales opportunities. So, use techniques like just-in-time inventory management to minimize the amount of inventory by ordering only what’s needed to meet customers' demands.

• Improve accounts receivable management: Ensure your invoices are sent to customers on time and that payments are collected promptly. This could involve implementing policies, such as mandating pre-payments or offering discounts for early payments. Plus, sending out invoices as soon as possible will help you speed up the collection process.

What are the three techniques to manage liquidity?

Following are the three techniques to manage liquidity; be sure to regularly review and update these techniques to reflect the changing business environment and liquidity risk profile:

• Creating contingency plans for liquidity stress scenarios: It involves preparing for possible solutions that could cause a sudden or severe liquidity shortage, such as market disruptions, operational failures, or unexpected cash outflows. It helps you identify and mitigate the potential sources and impacts of liquidity stress and establish alternative funding sources to cope with the crisis.

• Establishing effective cash flow forecasting practices: It involves projecting future cash inflows and outflows based on current trends, future assumptions, and historical data. It can help you anticipate your liquidity needs and gaps and plan for cash management actions, such as investing or borrowing funds.

• Monitoring key performance indicators (KPIs): It involves measuring and tracking the performance of the business in terms of its liquidity management objectives. It can help you evaluate the efficiency and effectiveness of your liquidity management processes.

What is an example of liquidity management?

Imagine a small retail store selling clothing. The store owner practices liquidity management to ensure smooth operations:

• Cash reserves: The store keeps a minimum cash balance in its cash register to handle daily transactions and provide change to customers.

• Cash flow projection: The owner forecasts monthly cash flows, considering sales, rent, utility bills, and payroll expenses. This helps anticipate periods of higher cash needs.

• Short-term investments: Excess cash beyond immediate needs is placed in a money market account, earning a modest interest rate while remaining easily accessible.

• Supplier negotiations: The owner negotiates with suppliers to extend payment terms from 30 to 45 days, aligning better with the store’s sales cycle.

• Inventory management: The store tracks inventory turnover and adjusts order quantities to prevent excess inventory, freeing up cash.

• Emergency fund: The store maintains an emergency fund of two months of operating expenses to cover unexpected disruptions.

• Line of credit: The owner establishes a line of credit with a local bank. They can draw from the credit line to cover immediate needs if there's a temporary shortfall.

By implementing these strategies, the small retail store maintains sufficient liquidity to cover expenses, seize opportunities, and navigate unexpected financial challenges.

Use of Agicap for liquidity management

Agicap is a cloud-based solution that helps small and medium-sized businesses manage liquidity challenges. It offers features such as real-time liquidity monitoring, enabling access to cash positions across accounts and currencies while providing cash flow forecasting analysis for planning.

Agicap supports risk scenario modeling to assess strategy resilience and facilitates integration with financial systems for streamlined data processes. It also furnishes comprehensive liquidity reporting and compliance tools for thorough evaluation.

These features empower businesses to rigorously monitor and quantify liquidity performance, track key performance indicators, and conduct in-depth cash flow analysis.