Liquidity Management is the Lifeblood of Your Business

By Edi Poloniato
Co-Head of Banking Solutions, Kyriba

According to Emmanuel Kant, someone’s intelligence can be measured by the quantity of uncertainties he or she can bear. I think we can also apply this definition of intelligence to organizations and especially to companies. “Liquidity Intelligence” for finance departments is crucial, and during this period of both strategic and operational uncertainty, liquidity is an important enabler of better decision making and cost containment. With the inversion of the yield curve for US Treasury 10-year and 3-month Treasury rates continuing to deepen, we are almost certainly headed towards a global recession within the next several months.

Given the current economic and financial uncertainties, finance departments are facing a multitude of high-impact challenges, but often without the proper processes and tools at their disposal. This article looks at the challenges finance organizations face and what actions CFOs can employ to reduce adverse impacts and create better liquidity management environments for their organizations.

Four Disruptors Creating Liquidity Uncertainty

Unsettled labor markets, supply chain issues, geo-political conflict, and global inflation all create liquidity uncertainty.

1. Labor Markets
With the onset of the global COVID pandemic, employer-employee relations have been profoundly disrupted. The meaning of the word “work” is changing. Flexibility expectations are growing and new phenomena such as the “great resignation” are disrupting business activities.

2. Supply Chain
Supply disruptions due to the quarantine period in China impacted businesses in many countries, as China accounted for 30% of global manufacturing outputs in 2021 (22.5% in 2012). World trade continues to be impacted by supply chain issues with continued Covid restrictions and energy shortages exacerbating disruptions to the flow of international commodities and goods.

3. Geo-political Conflict
The unstable environment generated by the conflict in Ukraine is contributing to higher volatility in the forex and commodity markets. The FX market is extremely volatile with the Euro now trading below parity with the US dollar, representing a decrease of 15% in one year. At the same time, this volatility, coupled with the reluctant and potentially late actions by central banks, has not slowed USD strength. All major currencies are impacted, generating higher hedging costs for companies.

4. Global Inflation
Global inflation is increasing, and it’s difficult to predict if peak inflation has been reached. Even Japan, which has gone through a period of almost 20 years of deflation, is experiencing an unprecedented inflation rate. While the causes of this inflation are different in Europe (impact of rising raw material and energy prices) and the United States (wage growth in a tight labor market), they have the same consequence: the energetic interventions of central banks rapidly raising rates with the objective of curbing inflation (until the job is done).

The above four phenomena have emerged simultaneously and continue to interact with each other, creating a significant and remarkable level of uncertainty for the CFO and treasury.

Increased Cost of Liquidity

Liquidity represents available cash, or in other words, the cash that a company can make available at any time without any risk of short-term repayment. Liquidity includes cash available in bank accounts but also cash available through confirmed financing or short-term investments that can be immediately converted into cash. Its cost increases as central banks raise interest rates to fight inflation. And liquidity is essential for companies to finance their operations. More than ever, finance departments must optimize their internal liquidity (cash and working capital) before calling on external liquidity, especially as it becomes more and more expensive and rare.

CFOs Are Advancing Liquidity Intelligence

Below are some of the many ways CFOs are advancing liquidity intelligence, including using liquidity planning to anticipate cash flows, analyze debt, manage commodity risk, and optimize working capital programs.

1. Gaining Visibility, Scrutinizing Liquidity
The already high cost of liquidity is increasing, a major problem for any company today. However, some companies are taking steps to address the rising costs of working capital. One month ago while attending the Eurofinance conference in Vienna, I had dinner with Fernando Cebada, the SVP, Corporate Treasury for NH Hotel Group, a long-standing client of Kyriba in Spain. I had not seen him for the last three years and was delighted to meet him again. We talked about how Covid impacted our personal and professional lives. He told to me how brutal the impact of the lockdown in March 2020 was for his organization. Suddenly, cash inflow across the entire group dramatically decreased due to the slowdown in travel and tourism.

Fernando told me how the Kyriba Platform helped him through the Covid crisis by allowing him to accurately manage all group cash positions. Controlling all group cash positions helped him identify and optimize the funding of the company by using all internal sources of cash worldwide. The liquidity situation of the company was scrutinized daily as their objective during the Covid crisis was to guarantee the continuity of the business. More than ever, liquidity was seen as the lifeblood of NH Hotel Group and we at Kyriba are very proud to have helped our client successfully navigate the challenges of Covid.

2. Using Liquidity Planning to Anticipate Cash Flows
Knowing the liquidity position is essential, but CFOs must also anticipate and forecast cash flows for working capital and capital planning. Implementing collaborative tools enables all companies or business units to report cash flow forecasts in an efficient way. The use of artificial intelligence creates opportunities to take historical information and build future cash flows scenarios through machine learning and algorithms. Gaining visibility, forecasting accurately into the future and consolidating global cash flow forecasts into meaningful dashboards and reports means better decision-making for future expenditures and use of costly debt.

3. Conducting an In-Depth Analysis of Your Debt
The cost of debt is continuing to rise. A prerequisite to optimize the debt costs and restructure debt for any CFO and treasurer is to understand its structure (gross debt, net financial debt) in the short, medium, and long term by incorporating cash forecasting.

4. Optimizing Management of Currency and Commodity Risk
Due to the volatility of currencies and commodity markets, hedging costs and uncertainty continue to rise—or, at a minimum be unpredictable and create wider swings—adversely impacting the financial reporting and income statements of companies. CFOs can create better finance responsiveness and effective management of fx and commodity price risk by giving their teams the ability to know, understand, and analyze the exposures while properly assessing hedging costs.

5. Creating and Accessing Lower-Cost Liquidity through Optimized Working Capital Programs
Reducing working capital and cash conversion cycles provides companies with added sources of less costly liquidity. By implementing supplier financing programs to extend payment timelines, CFOs can improve DPO while at the same time getting suppliers the funds they need to strengthen and add more predictability to the inventory cycle. Another source of liquidity is the use of Receivables Finance programs that reduce DSO and offer lower cost liquidity vs. debt.

6. Using Technology and Process Transformation to Counter Cybercriminal Attacks and Internal Fraud
The management of liquidity must take place on a platform that guarantees a high level of security through constant investments in innovation and improvement across these tools. Kyriba is the leading SaaS finance and treasury platform that is SOC1/2 audited for controls and our Financial Data Security is leading class. With a proven track record over more than 20 years in Treasury and Finance SaaS solutions, our extensive, advanced protection for your data, security, controls, and operational processes will keep your firm protected.

7. Choosing an “Open API” Platform to Easily Integrate with Internal and External Systems
Monitoring liquidity requires reliable financial information. But global companies still face an extensive mix of banking connectivity protocols, formats, file types, and practices (depending on the country and the bank). Addressing those issues requires tools that know how to combine emerging banking APIs with older connection modes that are still used worldwide. In a fast-changing environment, CFOs and their finance leaders need software solutions that adapt and easily connect third-party applications to integrate new banks, ERPs, systems, and outside requirements.

Liquidity Management as a Catalyst for Resilience

The solutions detailed above are a means for the CFO and treasury to mitigate the multitude of risks inherent in the current global economic and risk context. Indeed, if efficiently integrated, their benefits will multiply and become the best way for finance departments to increase the resilience of their business in times of uncertainty and volatility.

CFOs can work with CIOs to become the catalyst for the digital transformation of financial departments while breaking down barriers and connecting them to their internal and external ecosystems. Companies making this choice will benefit from a real strategic advantage emerging from current and future crises by outperforming their competition. With the current situation our individual and collective intelligence is inevitably challenged. The same goes for finance departments as they will have to adapt to current market conditions.

In the words of Stephen Hawking, “Intelligence is the ability to adapt to change.” Let’s leverage this definition of intelligence and apply it to liquidity to create opportunities to emerge even stronger from this period of financial difficulties and be poised for higher growth in the years to come.

To learn more about how we help CFOs improve cash flow and liquidity forecasting, visit our Cash Forecasting use case.