Accurate liquidity management enables visibility into your organization’s financial health and gives you a competitive advantage. It also speeds up bigger strategic decisions by making it clear what’s financially feasible. But it’s challenging to achieve that visibility when you have many bank accounts, suppliers, ERP systems, etc. across multiple countries and currencies.

Cash Management

Managing cash flow is a critical business function that includes tracking cash inflows and outflows, forecasting future cash requirements, and investing surplus cash to generate returns. It also involves optimizing accounts payable and receivable processes and reducing costs by taking advantage of early payment discounts and negotiating better financing rates on debt. The key to cash management is monitoring it on a daily basis and making timely adjustments when necessary. This allows businesses to avoid paying interest on unpaid invoices and to stay in control of financial issues like a sudden increase in expenses or a reduction in revenue.

Cash managers also oversee the company’s bank accounts to ensure that transactions are accurately recorded. This process is known as bank reconciliation and involves comparing and matching the movement of funds in the company’s accounting records with those in its banking accounts. It is often done using specialized software that can automate the process and improve efficiency, accuracy and productivity.

Cash Flow Management

Cash is among the primary assets that individuals and businesses use to pay their liabilities and invest for future growth. However, this cash can be jeopardized when an entity is not properly managing its liquidity and treasury processes. Achieving a healthy cash flow is crucial for business survival and long-term growth. It involves monitoring the amount of money coming in and going out, forecasting future cash needs and managing any excess funds. It also includes analyzing and establishing processes to identify opportunities for liquidity management in banks and treasury improvements.

A few key techniques of cash management include extending payment terms with suppliers, offering early payment discounts to customers and ensuring that accounts receivable processes are efficient. Additionally, using a credit card solution that provides quick, secure payments can help expedite the flow of cash in and out of a company. This can help reduce the risk of overspending and putting a business at financial risk during an economic downturn.

Liquidity Risk Management

As the industry recovers from Covid-19, a good opportunity exists for bank leaders to re-examine liquidity risk management practices with a more critical and business-oriented lens. This includes evaluating the accuracy of data feeding into these risk assessments and the frequency of reporting. The faster and more precise that cash forecasting is, the less likely a bank will find itself with trapped cash scenarios in market turbulence or a crisis event like a deposit run. It also helps reduce buffer costs and correctly calculate the amount of liquidity funding required to meet obligations.

Liquidity risks are typically the result of a mismatch between liabilities and income. This can occur for many reasons, such as a lack of short-term deposits, a reliance on short-term funds, or concentrated lending in longer term securities. A well-designed maturity ladder, along with liquidity management system forecasting using multi-scenario analysis, can help minimize this problem and improve a bank’s resilience to insolvency.

Credit Risk Management

Credit risk management involves identifying and mitigating the risks that banks face when lending money to individuals or businesses. This includes assessing the likelihood that debtors will default on their loan payments and considering other factors, like the borrower’s financial health and the terms of repayment. This helps to ensure that the bank can meet its loan obligations.

A well-defined credit risk management process can help mitigate these risks. This includes implementing policies that limit connected-party lending and large exposures to related parties, requiring regular management information systems reports from borrowers, and establishing credit loss reserve levels for each individual loan portfolio. It also includes monitoring and reporting of key metrics like expected credit loss (ECL), risk-weighted assets, new business quality, concentration risk and portfolio performance, to divisional risk committees and forums, the Risk Management Board and other senior management.

The credit risk management process also involves reviewing data sources to verify the accuracy of models, and implementing a better way to analyze and communicate information with stakeholders. For example, banks can use data visualization capabilities and business intelligence tools to get important information into the right hands at the right time.

Conclusion

In today’s real-time payments world, banks need a complete picture of their liquidity. Excellent liquidity management provides visibility into financial resources, spend, debt, and short-term investments at all times — and makes the institution more attractive to investors. Manual reporting takes up valuable time and is susceptible to human error. Automating liquidity reports can reduce the risk and make them available in a few clicks.