Treasury’s Strategic Role in Liquidity Planning

The time is right to evolve cash forecasting.

By Thomas Gavaghan | VP of Global Presales, Kyriba

Corporate treasury and finance teams are grappling with a number of crises—record-setting inflation, foreign exchange (FX) volatility, supply-chain shortages, and tightening of credit, to name a few. Together, these challenges are impacting every stage of the cash flow cycle. Meanwhile, rising interest rates have ended the era of cheap money.

Precision and a full view of financial data have never been more important to CFOs and treasurers, especially those who grew up in a zero-interest-rate environment where fewer variables impacted bottom-line growth. In 2023, finance chiefs are tasking their teams with developing new practices to more precisely scrutinize and manage liquidity across multiple scenarios, and through both short- and long-term time horizons, to improve their margins of success.

Liquidity planning is an evolution of traditional cash forecasting that surrounds the cash forecast with data which supports better-informed liquidity decisions. Liquidity planning makes the forecast actionable by connecting the outcome of cash forecasting—how much cash the organization expects to have—with information about the levers the CFO and treasurer can pull to meet cash flow targets and mobilize cash. These levers may include investment, borrowing, credit facilities, and aspects of the cash conversion cycle. Liquidity planning data tells finance teams where sources of cash are so that they can execute decisions rapidly, enterprisewide.

The keys to liquidity planning are the injection of new information into treasury and finance decision-making; the reconciliation of previously disparate forecasting and budgeting processes, which were managed by treasury and financial planning and analysis (FP&A), respectively; and the delivery of liquidity models that can proactively answer what-if scenario questions such as: “What happens to liquidity if the dollar drops 10 percent?” “What if interest rates rise twice this year, or if we lose 10 percent of our strategic customers?” And the more dire “How many days of liquidity survival do we have left?”

CFOs and finance leaders lack this level of actionable information today, which has stimulated an evolution of cash forecasting.

The Liquidity Planning Approach

Although forecasting and planning are not new processes within finance and treasury, many cash management policies are under revision as organizations adapt to the volatile economic landscape, including unprecedented currency headwinds and the most rapid increase of interest rates in recent history. These events have brought together finance and treasury teams to reconsider the cash lifecycle and how to proactively manage liquidity.

Preparing the liquidity plan. Let’s start by focusing on the cash component of the liquidity plan. Access to historical data is important for trending purposes, as well as for real-time variance tracking and adaptation of plans. But liquidity planning also requires the integration of other data, including information about accounts receivable (A/R) and accounts payable (A/P). In addition, incorporating the organization’s investment position, financial obligations tied to capital-markets activities, and credit availability are critically important in today’s liquidity crunch.

As part of the liquidity planning process, treasury teams evaluate the organization’s historical liquidity levels and short-term obligations. They should also closely analyze the company’s regional liquidity needs, based on its organizational structure, since key regions across Europe, the Americas, and Asia-Pacific (APAC) carry their own unique cash management challenges and constraints.

As they work with the finance group on this process, treasury staff need to identify the key stakeholders within the organization and the appropriate sources of cash forecasting data. This helps streamline processes, so that information is more timely and can be quickly analyzed and stress-tested.

Executing the plan. In short-term planning, treasury needs quick access to key liquidity information. Time horizons may vary from one organization to the next, but short-term liquidity plans generally extend from one day to a few weeks in duration.

Short-term liquidity plans are built upon historical actuals, so treasury needs to incorporate booked financials such as A/R, A/P, payroll, and obligations stemming from capital-markets transactions. In analyzing this data, treasury teams can leverage new artificial intelligence (AI)–enabled technologies in which machine learning algorithms learn from the company’s historical cash activity, accounting for seasonality and variability in cash over multiple time horizons.

This AI-powered approach enables treasury groups to compare calculated short-term liquidity levels against risk policies, with adjustable levels of certainty. Thus, they can forecast more confidently. This approach can also empower finance and treasury teams to analyze the impacts of various possible scenarios, such as paying suppliers earlier or later to control working capital. These analyses can inform much better decision-making around cash management, especially during the period close when the company is trying to hit specific cash flow targets.

Longer-term liquidity planning builds upon the short-term liquidity plan, but balances different data points as the longer-term investment, borrowing, and capital-markets positions are composed differently and sourced from alternative data platforms with in the organization. Further, longer-term projections should replace working capital data (i.e., A/R and A/P) with budgeting information. Similar to shorter-term projections, scenario planning is crucial to understanding the impact of external variables and assumptions within long-term corporate liquidity.

During execution of the company’s new liquidity plans, the treasury team should identify the key stakeholders involved in the planning process, then determine how they can efficiently synchronize the necessary data.

Measuring and refining. Timing is always essential, as the speed of data is driving the modern economy. Forecasts and liquidity plans survive when they are timely and when treasury and finance staff can measure, in real time, where they are in relation to their goals. This helps the CFO steer the company toward soft landings in their free-cash-flow guidance.

How Treasury Can Lay the Groundwork for Liquidity Planning

Treasury is a key player in the development of a liquidity planning process because treasury is usually responsible for cash forecasting for the organization. To achieve optimal results, treasurers should prepare for the rollout of liquidity planning by reviewing their current cash forecasting processes and ensuring the team is prepared to offer strategic guidance:

• Review the company’s short- and long-term financial needs.
• Establish optimal cash levels required for the company, considering geographical positions and regional business needs.
• Identify sources of planning data (ERP system, historical trends, etc.).
• Establish how the forecasting process will be managed, who will be involved, and where the data will be consolidated from.
• Clearly define the organization’s policies for measuring cash and liquidity, and revise those policies in concert with the CFO’s broader financial objectives.

Corporate treasury and finance teams are tasked with understanding the current economic challenges and managing complexity amid international market uncertainty. The office of the CFO is dealing with a multitude of crises that have impacted the cash flow cycle.

Through liquidity planning, CFOs and treasurers can structure programs to help grow their organizations, meet internal and external key performance indicators (KPIs), and make the cash forecast actionable during times of economic uncertainty. With the treasury team’s expertise in managing liquidity and delivering timely cash forecasts, they are well-positioned to partner closely with the CFO in planning corporate liquidity. By doing so, they prepare their companies to effectively navigate these challenges and build financial value in the long term.

Thomas Gavaghan is vice president of global presales at Kyriba, a treasury management system vendor. Kyriba’s newly launched Cash Management AI module supports liquidity planning projects by enabling organizations to quickly amass, structure, and analyze data, enabling the simultaneous scenario modeling needed to make informed decisions.

Reprinted with permission from Treasury & Risk ©️ 2023 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited.