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Liquidity Management Strategies 101

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In today’s business climate, most companies are dealing with increasingly tight margins. This economic challenge is not likely to change in the foreseeable future and makes implementing liquidity management strategies more critical than ever. 

A number of factors can impact liquidity, such as seasonal fluctuations, global events, customer payment patterns and supplier payment terms. Such volatility means businesses can no longer hope for a boon of extra cash and then decide what to do with it after it comes in. They must put a robust plan for managing cash in place and make every effort to follow it.

So what is liquidity management exactly? Simply put, liquidity management is the proactive process of making sure a business has enough cash on hand to maintain solvency and avoid bankruptcy. It takes into account your short-term obligations such as payroll and bills as well as long-term needs such as loan repayments and increased capital.

When your cash flow trickles to the point that you don’t have enough cash to pay bills and meet other financial commitments, you have a couple of survival options. None of which is all that favorable. You can borrow money, sell assets or reduce headcount. It’s a bit like being in a hole and then digging that hole deeper before you start building the ladder to climb out of it.

That’s why it’s crucial to implement effective liquidity management strategies–before you have to resort to one of the last ditch efforts to remain viable. Proactive steps can ensure you’ll have enough cash to pay the bills and avoid jeopardizing your business by taking on additional debt at less than desirable terms or selling assets at a deep discount.

There are a number of different liquidity management strategies that businesses can adopt. Ideally, you would use them all. But you may have to use some combination of strategies depending on the specific needs and circumstances of your business. In this article, we’ll go over six of the most common effective strategies to improve liquidity management.

The importance of liquidity management

Having a sound liquidity management strategy is vital for several reasons. First, not only does it help you better manage your cash flow and finances, it ensures that you have enough money to cover expenses and capital investments. 

Second, an effective liquidity management strategies helps you anticipate any potential shortfalls in cash flow, so you can take corrective action in advance. 

Next, having the right liquidity management strategy in place can help businesses access capital more easily and on better terms. This is because lenders will be more willing to offer financing to businesses that demonstrate sound liquidity management than to those that don’t. 

And finally, having the right liquidity management strategy in place is important for keeping your business running smoothly–positioning the business to ride out any seasonal fluctuations or delays in customer payments that could otherwise adversely affect cash flow.

6 Strategies for improving liquidity management

Each of the six strategies for liquidity management can be accomplished through manual  processes; however, that’s not the ideal approach. Your finance team must devote hours each month to collecting data, creating pivot tables and analyzing it. It’s a time-consuming process to produce reports that don’t give you a real-time view of your cash. 

Companies who really want to get ahead and put these strategies to work have turned to cash management platforms that combine the efficiency of automation with machine learning (ML) and artificial intelligence (AI). These types of software solutions make liquidity management easier and more effective. See how this biotech company focused on the first strategy to quickly improve its liquidity management.

1. Monitor cash flow

Monitoring and understanding the cash flow of a business is an essential part of liquidity management. Finance teams should regularly review their cash flow statements and use them to anticipate any potential shortfalls in cash flow. This will help them to plan accordingly and take corrective action to avoid any liquidity problems. 

Gain a more accurate view of cash flow with real-time data through cash management software.

2. Improve AR processes

One of the first places to start with this strategy is to send invoices out more quickly and accelerate your collections. Even if your customers wait until the due date to pay, the sooner you can get invoices created, the higher the potential to lower your DSO. 

But it’s difficult to produce invoices in a timely manner if your team relies on manual processes. When you have AR automation in place, invoices can be immediately generated from sales data and sent electronically to your customers. Also when your customers have multiple payment methods and a self-serve portal available, they’re much more likely to pay early.

Save time, money and speed up collections with automated AR processes.

3. Maintain the right amount of cash reserves

Having a reserve of funds is an important strategy for managing liquidity. Businesses should be aware of the current and future needs of their business and set aside sufficient funds for any unexpected shortfalls. But you also want to make sure that you don’t set aside more cash than is necessary.

This excess cash can become idle cash which is the cash sitting in accounts and not working for you. 

Identify all your excess cash with AI-driven technology so you can make the most of it.

4. Manage debt wisely

Businesses should be careful to only take on debt when they’re confident they’ll be able to repay it. They should also ensure that they have a clear understanding of any terms and conditions related to their loans and tax breaks. Having manageable debt will help improve the liquidity and cash flow of the business. 

Make better informed decisions with insights gained from AI-enabled platforms.

5. Negotiate better terms with suppliers

Another liquidity management strategy focuses on your suppliers. You should always strive to negotiate the best terms possible which may include obtaining favorable payment terms or making bulk purchases. These tactics can help you save money and improve your overall liquidity.

It seems like this would be simple and straightforward, but when you have multiple suppliers, determining the most beneficial time and payment terms for each is cumbersome and time-consuming if you’re using manual processes. 

Determine the best time and payment terms for your suppliers with software that uses ML and AI. 

6. Plan ahead 

Planning ahead is an important step in effective liquidity management. You should always plan for the longer-term, taking into account seasonal fluctuations, customer payment patterns and supplier payment terms. Having a thorough liquidity management strategy in place can help you better manage your finances and anticipate any potential problems with cash flow.

Cash forecasting is key for optimizing this strategy. Keep in mind that the more accurate your forecasts are, the better decisions you’ll be able to make.

Produce more accurate forecasts from the real-time data that AI-driven cash forecasting software provides.

Looking to Improve Your Liquidity Management Strategies?

Liquidity management is an important aspect of running a successful business. This can be achieved by monitoring cash flow, improving AR processes, maintaining sufficient reserves, managing debt wisely, negotiating better terms with suppliers, and planning ahead. By implementing these strategies, businesses can be better prepared for any potential shortfalls in cash flow and maintain their financial stability.

If you’d like to learn more about how to leverage technology for more effective liquidity management, check out Payference. We can answer any questions you have or schedule a demo.