Corona still dominates our everyday activities. For many treasury departments, a focused liquidity management together with a reliable risk management remains an important topic. We looked at what could be lessons learnt from the crisis regarding a successful liquidity management and which factors are indispensable. 

Data availability and quality are of the essence

Practice shows that many companies have a hard time when it comes to reporting and data management, especially if it concerns the guaranteed availability of reliable data and the necessary analyses. Oftentimes, data - whether past or future - is not available in a sufficient granularity or accuracy. This may include account and cash pool balances, receivables and payables or business performance data.

In view of the technical availability, it is nearly indispensable to manage data centrally. It creates the basis for a structured and accurate liquidity management. A central data hub, where all the data is compiled and processed even beyond departments, is required. This is where data from different sources, such as the financial accounting, the CO reporting or from the Treasury Management System can bring significant insights. 

As far as content is concerned, it must be assured that future business transaction are reflected reasonably and accurately for all business units. The planning should also include business transactions that may not be located in the original systems, such as M&A transactions. 

Reliable planning methods are essential

An important building block of liquidity management is a reliable liquidity planning, preferably automated, standardized and consistent. Four steps have to be defined, coordinated and operationalized for a planning and analysis model to be functional. 

  1. An automated data input that has been tested for its quality and an analysis of the liquidity situation must be ensured for the planning. 
  2. A clear and comprehensible planning approach must be provided for a liquidity forecast. A high degree of standardization with a simultaneous possibility to intervene manually improve transparency.
  3. A scenario catalog that has been tailored to the business environment and that defines important parameters for the scenarios help anticipate future liquidity developments and allow preventive measures. 
  4. An automated reporting that is tailored to its readers regarding granularity of data should be implemented. The process design should also focus on checking for reasonableness and the validation of the calculated plan data.

Continuous monitoring and an ongoing dialog help the planning

The liquidity KPIs, the development of driving forces, the macro-economic situation and the risk threshold have to be monitored continuously. An ongoing dialog with the relevant stakeholders regarding identified causes and effects on liquidity developments may bring forth new actions. In doing so, it is important to be as precise as possible on the one hand and to automate as many monitoring processes as possible on the other hand. This allows a quick reaction and provides maneuvering room in case necessary measures need to be taken. 

Substantial factors: intelligent cash strategies and interdisciplinary action

A cash strategy informs the cashflow planning across units. It provides the framework regarding organization, governance and management. In particular, the cash strategy should be a balance between various instruments, such as intercompany financing, targeted cash allocation (for example in the form of cash pools or strategic FX management) and active working capital management. The thus established cash culture should not end at the department’s door, however. Instead, it is important to establish end-to-end thinking and to look at all processes along the value chain. The interdisciplinary work required by Treasury, Controlling, Accounting and other nearby functions (for instance, inventory and order management) contributes much in this respect. 

Conclusion: Speed of reaction is of vital importance

The different aspects, such as data availability, transparency of forecasts and ongoing monitoring help create a successful liquidity management. Increasing the speed of reaction ensures better crisis management.

Being agile and speedy in reaction are important success factors for liquidity management. The process automation and availability of detailed and relevant data improves the ability to anticipate and provide well-founded preventive measures. A comprehensive early warning system makes it possible to identify changes at an early stage and to react appropriately to market movements. Companies with the skill to adapt quickly to new situations are clearly in the advantage. 

Source: KPMG Corporate Treasury News, Edition 109, March 2021