Building financial resilience: 12 proven strategies for managing liquidity

Managing liquidity is key to giving your company the financial freedom to grab opportunities and handle uncertainties. 

As a finance pro, you know that cash and liquidity management isn’t just about keeping your business afloat; it's about strategically positioning yourself to:  

• Swiftly meet short-term obligations and seize growth opportunities.
• Break free from the costly grip of emergency financing.
• Optimize excess cash through safe investments.
• Identify and resolve customer payment issues early.
• Maintain flexibility to handle unforeseen events.

… and so much more.

In other words, it provides flexibility - and that flexibility is key to navigating the inevitable ups and downs of business.  

Read on to learn more about: 

• What liquidity management is
• The importance of managing liquidity
• The role of a CFO in liquidity management
• The difference between liquidity management vs working capital
• Liquidity management strategies

What is liquidity management?

Liquidity management is about ensuring your company always has enough cash, not just for the daily grind but also for tempting growth opportunities.

Managing liquidity is a balancing act that involves:

• Predicting future cash flows to avoid surprises
• Setting aside money for unexpected needs
• Securing access to loans or credit lines for flexibility 

Think you can just wing it, assuming the cash will be there for vendor payments, employee salaries, or new inventory?

Think again.

Without savvy forecasting, a rainy-day fund, and a handy credit line, you might be blindsided by an unexpected financial pothole.

Good liquidity management means being prepared and not just hoping the funds will be there when needed. It's a proactive (and essential) approach to handling finances.

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Why is it important for a business to manage liquidity?

Without sufficient cash and other fluid capital, businesses can't make payroll, support critical investments, or simply pay the bills to keep the lights on.

But if you're sitting on a cash cushion, you're ready to ride out any storm.

Economic downturn? Bring it on. 

Sudden crash crunch? Handled like a boss. 

A golden opportunity for growth? You’re ready to seize it with both hands!

The CFO’s role in managing liquidity 

The CFO's role in cash and liquidity management is vital. If you’re the CFO, it’s on you to assess danger zones early AND take risks to find new opportunities.

This means:

• Forecasting cash flows and ensuring your company can handle its financial commitments.
• Juggling assets to strike that perfect balance between risk and return.
• Playing the credit management game to keep the cash flowing.
• Being nimble and adjusting financial strategies as the market fluctuates.
• Implementing risk management strategies to dodge financial landmines.
• Staying on the straight and narrow with regulatory compliance and financial reporting.
• Managing working capital to ensure your company's financial engine runs smoothly.
• Teaming up with other departments to align financial goals with the broader business strategy.

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What’s the difference between liquidity and working capital?

Liquidity management and working capital are related but distinct concepts in financial management. 

Liquidity

Liquidity refers to how quickly (and easily) a company can convert its assets into cash to meet its short-term obligations. It's a measure of the company's ability to pay off its short-term liabilities without raising external capital.

Common measures of liquidity include the current ratio (current assets divided by current liabilities) and the quick ratio (cash, marketable securities, and accounts receivable divided by current liabilities).

Working capital

Working capital is the difference between a company's current assets and current liabilities. In other words, it's the capital you have to keep daily operations running.

Positive working capital? You're in the clear, with more short-term assets than liabilities. Negative working capital, though, could mean liquidity headaches on the horizon. 

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12 Liquidity management strategies

Managing liquidity is essential for maintaining the financial health and operational stability of your business. 

But where should you even begin? 

Below are 12 strategies to help with corporate liquidity management: 

1. Establish cash reserves

Create a financial buffer by setting aside funds for unexpected situations. This ensures you have the liquidity to cushion against unforeseen expenses or revenue shortfalls.

2. Utilize credit lines wisely

Maintain access to credit facilities for added financial flexibility. Use these lines of credit judiciously to manage short-term liquidity needs without overextending your company's debt.

3. Balanced investment strategies

Align your investment decisions with your liquidity requirements. One of the best ways to do this is to choose the right mix of liquid assets and longer-term investments to optimize returns while maintaining cash availability. 

4. Accelerate receivables 

Implement policies that encourage early payments, such as offering discounts for prompt payments, and make sure to follow up on overdue accounts. 

5. Extend payables

Negotiate longer payment terms with suppliers without compromising relationships or incurring late fees. Focus on leveraging payment terms effectively to maintain a healthy cash flow.

6. Consider purchasing liquidity

Think about acquiring liquidity through external sources like short-term loans or lines of credit. This can provide immediate cash flow when needed, but it's crucial to weigh the costs and benefits carefully. 

7. Centralize all financial data

An effective technique for managing liquidity is centralizing all financial data. If you want to enjoy easier tracking, analysis, and decision-making, ensuring you have a comprehensive view of your company's financial health is the way to go.  

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8. Manage liabilities

Keep a close eye on your liabilities and strategically manage them. This includes negotiating favorable terms, refinancing debts at lower interest rates, and planning for timely repayments to maintain a healthy balance sheet.

9. Predict future cash positions

Regularly analyze and estimate your future cash positions. Use forecasting tools and models to predict cash inflows and outflows, helping you plan and avoid liquidity crunches. 

10. Diversify funding sources

Don't rely on a single source of funding. Diversify your funding sources to reduce dependence on any one option. This can include a mix of internal funds, bank loans, investor capital, and other financing options. 

11. Minimize expenses

Managing liquidity effectively involves looking for ways to reduce costs without compromising on quality or efficiency. This can include renegotiating supplier contracts, cutting unnecessary expenditures, or implementing cost-effective operational practices. 

12. Review financial statements often

Frequently review your financial statements to stay informed about your company's financial performance and position. This regular scrutiny enables you to spot trends, address issues early, and make informed strategic decisions.

FAQs: Liquidity management