What is cash and liquidity management? A treasury FAQ. (2024)

Cash and liquidity management refers to how companies manage their finances to maintain solvency and optimize financial efficiency. It encompasses a broad range of activities, known as liquidity performance, that include treasury management, risk management, payments, and working capital processes. The goal is to improve visibility into cash flows, manage risks, optimize investments, and make informed decisions based on real-time and accurate financial data.

Effective liquidity management involves delivering new information into treasury and finance decision-making, reconciling previously disparate forecasting and budgeting processes, and employing liquidity models that can answer what-if scenario questions. To effectively manage cash and liquidity, organizations must leverage technological solutions to gather data and gain greater visibility into their cash flow and liquidity positions. A single, integrated platform can provide real-time insights into cash positions, enabling companies to better manage their cash, reduce risk, and optimize their cash investments.

How Does Cash and Liquidity Management in Treasury Work?

Cash and liquidity management in treasury involves optimizing a company’s short-term financing and investments to ensure it has enough cash to meet its obligations, while also making efficient use of any excess cash. The liquidity and cash management process can involve tasks like cash forecasting, managing cash inflows and outflows, investing surplus cash, and managing financial risks. All of these tasks are necessary to gain clear visibility into an organization’s cash–visibility that is needed to support critical financial decisions and strategic business objectives.

Cash positioning or cash management, cash forecasting and liquidity planning are the three main pillars.

• Cash positioning is the practice of strategically managing and investing an organization’s cash resources in order to maximize liquidity and returns. This practice includes managing the timing of cash inflows, the duration of cash holdings and cash investments, and the timing of cash outflows and payments. Cash positioning can be managed on a global, regional, or local basis depending on the size of the organization and its resources.
  • Benefits: By adopting a cash positioning strategy, organizations can achieve greater efficiency in their cash management and liquidity, maximize their returns on investments, and minimize their exposure to financial risks.
• Cash forecasting is the process of predicting future cash flow for a company. It is a critical part of financial planning, as it helps companies make essential business decisions by predicting cash flow and managing liquidity. Cash flow forecasting is usually conducted on a weekly, monthly, or quarterly basis.
  • Benefits: Cash flow forecasting helps to minimize the risk of unexpected cash flow problems, as well as provide visibility into future cash flow. It can also identify areas for cost savings and potential opportunities for additional revenue. By predicting cash flow and managing liquidity, companies are better able to manage their financial health and make sound business decisions.
• Liquidity planning: is an important tool in treasury and finance management that helps organizations better manage their cash flow. It provides visibility into cash positions and forecasts, helping to identify and mitigate risks and optimize working capital. It also helps to identify areas within the organization where liquidity may be mismanaged or inefficiently utilized, such as underused bank accounts or excess cash balances. Liquidity planning and analytics leverages artificial intelligence (AI) and machine learning (ML) to create detailed cash flow forecasts that identify potential risks and opportunities.
  • Benefits: Using liquidity planning and analytics can help organizations improve their cash flow and optimize their working capital. Organizations can use this data to gain insight into their current and future cash positions, understand their liquidity status, and identify cash management strategies to optimize their cash flow. It can help identify areas where liquidity can be managed more efficiently, such as excess cash balances, and identify opportunities for maximizing returns on investments. Additionally, it can help organizations to gain visibility into their cash flow and more effectively manage risks and mitigate potential losses.

Table:Key differences between Cash Management, Cash Forecasting and Liquidity Planning

Other main tasks in cash and liquidity management include reconciliation, in-house banking, generating journal entries for bank transactions, posting transactions to the general ledger, and reconciling bank transactions to accounting entries.

• Account and transactional reconciliations are a set of procedures that help businesses compare and match the transactions recorded in their accounting systems to those stored in their banking and financial records. The process involves evaluating the accuracy of the data and ensuring that transactions are accounted for and recorded in the company’s financial statements. Account and transactional reconciliations are a critical component of the financial management process for companies of all sizes.
  • Benefits: Account and transactional reconciliations allow businesses to ensure accuracy in their financial statements and to stay compliant with regulatory requirements.
• In-house banking is a comprehensive treasury management solution that provides organizations with the ability to manage their financial operations from within their own organization. In-house banking can help organizations increase their financial efficiency, reduce their costs, and optimize their cash flow.
  • Benefits: In-house banking offers numerous benefits for organizations, such as improved visibility into financial operations, improved compliance and auditability, better control over cash flows, and reduced operational costs. Additionally, it provides organizations with the ability to manage their financial operations in-house, without relying on external banking partners.
• Journal entry generation for bank transactions is a process used to record financial transactions into a financial ledger in the form of journal entries.
  • Benefits: This process ensures that all financial transactions are accurately recorded, organized, and reported. The journal entries are then used to generate financial reports and provide useful insights into the company’s financial performance and position.
• Posting of transactions to the general ledger involves recording financial transactions into the accounting journal. This process consists of summarizing the transactions in the relevant accounts and recording the amounts into the general ledger. Also known as double-entry accounting, it is a fundamental component of financial accounting. Its main purpose is to ensure that the data entered in the accounting system is accurate and complete.
  • Benefits: Posting transactions to the general ledger helps to ensure accuracy and completeness of financial data. Additionally, it helps businesses to detect errors and reconcile accounts, allowing them to quickly identify and address inaccuracies. This process also helps to ensure that financial information is kept up to date and that financial statements are compliant with different regulations.
• Reconciliation of bank transactions to accounting entries involves the comparison of records of the transactions made through the organization’s bank accounts to those recorded in the organization’s accounting system. This process is necessary to ensure accuracy in the financial records, as well as to identify any discrepancies between the two and take appropriate action.
  • Benefits: It helps to ensure accuracy in the financial records, as well as to identify any errors or discrepancies between the two and take appropriate action. Furthermore, it can help to detect fraudulent activities or unauthorized transactions, which can help to minimize losses for the organization.

How Do Businesses Benefit from Cash and Liquidity Management?

Businesses can benefit from cash and liquidity management in several ways. It helps in improving visibility and control over cash flows, mitigating liquidity risks, optimizing working capital, improving return on investments, and making informed financial decisions. Effective cash and liquidity management can also contribute to the long-term financial stability and success of a business. A good cash management strategy can improve financial efficiency, reduce costs, and contribute to a company’s growth.

Visibility into an organization’s cash position, including location, currency, and liquidity position, is vital. With a timely and accurate picture of global cash across all banks and across all regions, treasury can create more accurate forecasts and plan for expanded free cash flow.

Effective cash and liquidity management is essential for companies to maintain a healthy balance sheet and liquidity position. It helps ensure that a company is able to meet its short-term obligations and can take advantage of investment opportunities without needing to rely on additional financing. Proper cash and liquidity management also helps companies ensure they have enough liquidity to cover unexpected expenses and potential losses.

What are the Effective Strategies for Cash and Liquidity Management?

Some effective strategies for cash and liquidity management include regular cash flow forecasting, efficient receivables and payables management, maintaining a liquidity buffer for unexpected expenses, investing excess cash in easily liquidable assets, and using technology solutions to gain real-time insights into cash positions.
Implementing effective cash and liquidity management involves a number of steps. Companies should:

• Develop a clear understanding of their cash flow, liquidity needs, and risk tolerances.
• Create a detailed cash and liquidity plan that is tailored to their specific needs and objectives. This plan should include a strategy for managing cash balances, monitoring liquidity, and investing excess funds.
• Establish processes and controls to ensure the plan is implemented and tracked on an ongoing basis.

Companies should also implement technology solutions to ensure accurate, complete, and real-time information. Technology tools can provide automated preparation and reconciliation of an organization’s daily cash position, allowing treasury to start each day with a cash position worksheet that displays cash positions through a combination of bank balances and transactions with expected workflows. Access to this information at the start of the day means that treasury has more time to build and analyze global cash forecasts, and the continued use of technology allows organizations to compare forecasts to actuals for any horizon to help improve forecast accuracy.

Additionally, organizations can take advantage of APIs in treasury management software to connect different systems to share cash data, execute cash management, and payments workflows automatically and in real time.

How Kyriba’s Cash and Liquidity Management Solution Helps

The right cash and liquidity management solutions can help organizations manage their cash and liquidity more effectively. To be effective, solutions should provide visibility into cash positions, improve cash flow, reduce costs, and offer sophisticated analytics to optimize treasury operations. With the right processes in place, organizations can take control of their cash and liquidity, maximize returns, and ensure long-term success.

Kyriba’s Cash Management, Liquidity Planning and Liquidity Analytics modules offer a complete solution to predict cash and liquidity requirements and make data-driven liquidity decisions.