Liquidity at the heart of business Resilience

Exploring a holistic approach to Cash performance

by Evelyne Legaux on 14-11-2024

 

This article looks at the criticality of liquidity management for corporates in a world of uncertainty, unpredictability & rapid change. More specifically, we explore the solid foundation companies must build along with practical steps to ensure that Cash positions effectively support business resilience.

Wherever we look, it is clear that liquidity management remains a top priority for executive leaders in support of the strategic direction of their business. Whether operating in sectors facing strong business seasonality, high inventory level needs to mitigate supply chain risks or else requiring strong capital investment in essence, liquidity management is a key concern for corporates and one that increasingly demands agility, adaptability & innovation.

 

Why is liquidity management so important? 
For instance, strong business seasonality can cause significant fluctuations in the level of Cash inflows from sales, with those periods of low inflows often being periods of peak Cash outflows as well, ahead of an upcoming high selling season. Having a strong grip on operating Cash Flow is therefore essential to ensure that liquidity can adequately accommodate market seasonality & business growth.

Likewise, the vulnerability of supply chains to external (global) factors that cause uncertainty or even disruption, can trigger the need for businesses to significantly increase inventory levels if they are to continue fulfil the ongoing customer demand, thus augmenting Cash usage. Here again, ensuring that the liquidity situation can sustain heightened needs of Working Capital is of the essence.

Equally, trading in a capital-hungry industry sector can create the need for businesses to immobilise/freeze large amounts of Cash over potentially long periods of time, while still being able to juggle with compelling & often unpredictable Cash outflows. Thus, being able to rely on robust Cash forecasting and effective liquidity strategies is paramount to business resilience.

 

What businesses should do to build a solid foundation to liquidity management
First and foremost, executive leaders must understand that solely relying on a P&L driven culture is not the most effective way to bolster financial health & ensure that liquidity can support a challenging business environment.

• Instead, Working Capital management (WCM) must remain top of mind in order to enhance both operational efficiency & effectiveness that ultimately drive optimized Cash generation versus Cash usage. For a WCM strategy to be healthy & sustainable though, it must be supported by strong awareness and an intentional Cash culture that is sponsored at Executive leadership level and instilled throughout the entire business organisation.
  To that end, more & more corporates go as far as appointing a Chief Cash Officer to their Executive board, whose cross-organisation mission is to flag any policies, processes, business decisions or behaviours that unnecessarily hamper Cash generation &/or inflate Cash usage. A Chief Cash Officer should typically identify & nominate Cash Champions throughout the organisation, build projects teams to address those Cash adverse actions/decisions/behaviours and design focused educational programmes targeting all relevant functional groups.
       
• Crucially important to instilling a strong Cash culture is the understanding by all business functional groups across the organisation that effective WCM resulting in healthy Cash generation/usage and robust liquidity positions supporting the business, is everything but solely a matter for Treasury & otherwise Finance teams.
  Instead, with liquidity management touching all business related functions, a holistic approach to it is paramount. All involved in Sales, Operations, Inventory management, Procurement, Trade Compliance, Operational Finance and FP&A must therefore clearly understand the impact of their daily actions/decisions/behaviours not just on the company’s Cash position but also on all other functional groups involved along the Procure to Pay and Order to Cash value chains. For this to happen, the Cash culture building effort must result in a mindset shift towards deliberate cross-functional collaboration. In such a positive work environment, it then becomes much easier for Treasury teams to dynamically engage with all stakeholders within the organisation and leverage live business data, with a view to enhancing the accuracy of Cash forecasting & financial planning, thus enabling effective liquidity management.
       
• Equally crucial is the need to revisit the internal incentives structure across the organisation, and align it with both the company’s top financial goals & business development strategy. Ensuring that all business functional groups & Finance teams alike are rowing in the same direction and rewarded for their performance in a consistent manner, is at the core of an effective & collaborative Cash culture. 

 

How can businesses practically safeguard liquidity in the face of challenges?
In parallel to building strong Cash awareness, corporates should consider tactical shifts in liquidity management tools, instruments & policy. As such, this requires Treasury & other relevant Finance teams to be adaptable, innovative & strategic in the way liquidity is actually managed. Keeping on top of any new financial products, technologies, compelling regulations or shifting best practices in the world of Treasury is of the essence here.

Most importantly, through this effort corporates should look at aligning financial strategies with the ever-evolving challenges & operational needs of the business. To this end, practical steps to be considered include:

• Leveraging the capabilities of new digital technology & predictive analytics to enhance the accuracy/granularity/frequency of Cash forecasting and the efficiency of WC processes end-to-end.
• Building on governmental momentum & evolving legislation in favour of E-invoicing to eliminate billing inaccuracy and bolster O2C efficiency & Cash generation.
• Optimising Cash management through rationalising the bank accounts structure, harmonising tools & processes and enabling real-time visibility of Cash positions across the globe.
• Implementing an effective Treasury Management System (TMS) to help manage external shocks & support strategic decision-making.
• Developing & nurturing effective partnerships with banks & other market players to secure financing flexibility while keeping abreast of the latest WC Finance & Cash management products on offer, thus giving customers & suppliers alike easier access to capital.
• Exploring embedded Finance options whenever designing, improving or streamlining WC processes to enhance both customer & supplier experiences.
• Critically looking at existing performance metrics & KPIs to ensure that they provide the insightfulness & meaningfulness required to bring WC & Cash management to the next level.
• Setting relevant, ambitious & Cash friendly operational targets across all functions involved.

 

Adopting such a multi-dimensional approach to liquidity management that encompasses optimised process efficiency, leveraged technological capabilities and a genuine Cash culture, is critical to safeguard financial stability and best support business resilience & growth opportunities in a fast-changing and often unpredictable trading environment.

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