From fragmentation to flow: The art of effective liquidity management

Effective liquidity management is key for businesses today, as treasurers need to make quick strategic decisions, manage risks, and capitalise on new opportunities in today’s fast-evolving geopolitical and macroeconomic landscape. According to Deloitte’s 2024 Global Corporate Treasury Study 2024, 62% of treasurers surveyed cited enhancing liquidity management as their top priority for the next 12 months¹, up from 56% in the survey’s last iteration in 2022².

In this article, we uncover some of the best practices in liquidity management and explore how treasury functions can incorporate flexibility and agility in managing liquidity processes while harnessing technological innovation to do more with less, at lower cost and greater speed.

When managing liquidity, treasurers may want to consider a phased approach, starting with the fundamental step of ensuring visibility into cash to make informed decisions. This can be followed by centralising balances to improve fund flows across the organisation, while creating a well-defined investment policy to invest any surplus cash.

As businesses expand into new markets and serve new customers, they are often required to open new bank accounts to meet their growing business needs. The result is fragmented cash that’s scattered across accounts, banking providers, markets, currencies and time zones. This can result in poor visibility of overall cash balances, which could hinder effective and timely decision-making.

Rationalising and consolidating accounts and banking providers can address this common pain point. Treasurers can consider centralising balance reporting across multiple accounts and providers into a single platform, either via Treasury Management Systems (TMS) or bank portals. Having a holistic view of cash helps treasury teams remain agile and supports decision making. Solutions like virtual accounts could also help reduce the number of physical accounts needed, while simplifying reconciliation and providing granularity on cash balances at multiple levels.

Obtaining a clear view of future cash flows is also essential in helping treasurers accurately anticipate liquidity needs. Precise cash forecasting can help multinational companies better manage FX risks and reduce over hedging in multiple currencies. However, fragmentation of data sources and manual spreadsheet-based processes are recurring challenges that treasurers often face around cash flow forecasting.

While there are multiple bank and third-party solutions in the market that can help improve the cash forecasting process, it’s critical for treasurers to have a clear understanding of their own forecasting requirements and objectives. Ensuring stakeholder buy-in and identifying the right data sources can also aid treasury teams in defining the right forecasting model and selecting a solution fit for their organisation.

Once visibility is achieved, ensuring cash moves efficiently within an organisation is the next critical step towards effective liquidity management.

Covering funding needs with available internal liquidity can help drive down costs, especially in a high-interest rate environment where external borrowing is expensive. Allowing internal cash to be centralised and optimised group-wide can significantly reduce borrowing needs at the local entity level. At the same time, aggregating financing requirements at the group treasury level enables an organisation to negotiate better borrowing terms and keep costs down.

Treasurers can consider solutions like cash pooling, which automates the consolidation of funds, allowing an organisation to offset short and long positions across group entities based on predefined rules, while deploying surplus cash for investment or debt repayments. Cash pooling naturally promotes self-funding for improved utilisation of internal cash, minimising external borrowing at the operating entity level. Centralising liquidity through multicurrency pooling structures can also reduce FX conversions, and lower gross FX exposures through intercompany netting.

With cash centralised in one place, treasurers can gain a better view of surplus cash. Not investing this, however, can carry a significant opportunity cost, so treasury teams may want to have a robust investment policy that takes into consideration various stages of the interest rate cycle. One may consider segregating the cash management portfolio into different components, each made up of different investment options with varying requirements in terms of security, yield, risk and volatility.

When investing, treasurers may want to assess solutions from banks, independent investment portals or asset managers which provide seamless execution of deposit placements and investments. Added features such as evaluation of reporting requirements and the ability to benchmark investment returns, can deliver additional value.

Partnering with an international bank with global capabilities and local expertise can help you navigate the myriads of challenges in managing liquidity and identify ways to optimise cash. HSBC’s Treasury Solutions Group brings expertise and experience, allowing us to share insights and best practices to businesses looking to drive their business to new heights. Find out more here.