Commercial banking -
What is liquidity management and why is it so important?
Liquidity management, cash flow forecasting, and debt solutions explained. Find out what liquidity management is and why it’s so important.
Don’t confuse ‘cash’ with ‘profit’
A profitable enterprise can fail if it doesn’t have sufficient available liquidity to meet its responsibilities as they fall due.
Fortunately, liquidity management can help ensure a business has enough cash available to meet its current and future obligations.
This is especially important in the current conditions of volatile markets, geopolitical uncertainty, and interest rates on an upward trajectory.
How do businesses work out cash flow requirements?
Cash flow forecasting (predicting as accurately as possible inflows and outflows) is a critical tool and should be a fundamental discipline in all enterprises
Liquidity management has two primary components, and businesses will often use a combination of both:
- Debt facilities, where appropriate or available
- Cash/deposit management
Using debt solutions to manage cashflow
Debt solutions can be a cost-efficient way of financing operations in the short- to medium-term (if companies can afford repayments) and are typically finite in terms of cost and therefore cashflow forecasting.
Typical debt solutions include:
- Overdraft facilities (usually subject to personal guarantees and tangible security depending on size) - facilitates management of peaks and troughs in cash flow. An arrangement fee is often charged, usually on an annual basis.
- Invoice discounting/factoring - gives a business an immediate advance on newly raised B2B qualifying invoices raised to a pre-agreed percentage (usually up to 85%) with the ‘balance’ received on the payment of the invoice. Typically, the lender charges a percentage on an annual/monthly basis.
- Term loans for ‘extended’ capital purchases - usually secured on an asset or other tangible security. This includes ‘asset finance’ – buying or leasing capital equipment (typically vehicles, plant, machinery rather than ‘soft’ assets like IT/computer equipment). Again, arrangement fees will be charged by the lender.
Managing cashflow: deposit accounts
Where a business is ‘cash rich’ and chooses not to utilise debt, there are a variety of deposit account solutions to ensure cash resources are in the right place and available at the right time to meet short/medium/longer-term obligations as they fall due.
Instant access deposit accounts
- Available on-demand with an interest rate agreed by the provider
- Ideal for immediate/short term obligations
- Usually require up to 100 days’ notice for withdrawal, depending on sector regulatory requirements
- More appropriate for medium-term obligation funding
Fixed or term deposits
- Typically range from three months to five years, with the interest rate dictated by the term and calculated daily and paid on ‘maturity’
- Most suitable for ‘surplus’ cash reserves not needed in the short/medium term and enables businesses to maximise interest return on balances
- Usually non-breakable during the term, so should only be considered where the capital is not required during the duration
- Not widely used but available to entities where a degree of risk is considered acceptable and funds are not cash flow dependent/impacted
- These can include government bonds/gilts by way of example
- Regulated and appropriate professional advice is a prerequisite
Many businesses, where opportunity exists, will use a combination of instant access, notice and fixed term solutions to maximise return on surplus credit balances – the longer the term, the better the rate/return.
At Arbuthnot Latham, we have a range of competitively priced deposit offerings and debt solutions to maximise return on surplus cash, underpinned by a wholly relationship managed approach.
Becoming a client
Take control of your finances today by completing our enquiry form. Alternatively, you can call us on the number below and one of our team will be more than happy to talk about your future.