On Liquidity Planning

How to transform the seemingly impossible into the definitely possible
On Liquidity Planning_HEADER
BELLIN author pictureAuthor: BELLIN

Got Liquidity?

Liquidity is as vital for a company as breath is for a living being. Without it, both will falter almost instantly. Even eminently profitable businesses might struggle to meet their obligations in times of crisis if they don’t have a sustained and dynamic liquidity management strategy in place. Hence the latter should be the supreme priority on a treasurer’s agenda.

Several years ago, Martin Bellin published an article in Treasury Magazine, titled “The (Im)possibility of Liquidity Planning”. With its negative prefix in parentheses, the headline neatly sums up the predicament of many a treasurer: even though liquidity management is potentially possible, there are various perceived and actual obstacles that need to be overcome.

Keep the plan rolling…

Finance professionals dealing with liquidity planning for the first time frequently grapple with a particular sense of disillusionment, as attempts to simply transfer experience from balance sheets and P&L calculation to liquidity management tend to fail. To make matters worse, there’s the unwieldy issue that –unlike accounting — liquidity planning defies being performed towards a specific, previously defined closing date within the fiscal year.

To avoid frustration and, subsequently, the downright dismissal of liquidity planning as inexact and thus futile, it is essential to understand that it is not a single, clear-cut task to be accomplished within a fixed timeframe but an ongoing, dynamic process. Consequently, an initial liquidity forecast neither has to nor will usually be accurate. But this shouldn’t discourage anybody, as the focus of liquidity planning is not to determine a fixed cash balance, but to establish a rolling, ever-evolving plan to be compared against the original forecast. It’s the resulting deviations that are the basis of the treasurer’s day-to-day business. According to them, he determines the necessity to adapt hedging decisions, to swap or newly create foreign exchange deals or to negotiate new credit lines. Only a constantly updated liquidity plan will enable a treasurer to keep track of all cash flows, to anticipate one subsidiary’s need for additional liquidity or to identify another’s liquidity excess.

TMS anybody? 

The goal of liquidity planning is, in a nutshell, to ensure that the right amount of cash, in the right currency is in the right place at the right time — at all times, ideally. To accomplish this, treasurers require visibility, which necessitates reliable data. Yet to this day, they struggle with the chore of having to consolidate numerous spreadsheets, which ties up resources and is prone to errors. On top of the obvious inefficiency, their data is constantly asynchronous, temporally as well as currency-wise. Overall, it doesn’t serve as a reliable basis for viable forecasting. This is where a TMS and with it the concept of Load Balanced Treasury can save the day: instead of the centralized approach of running the entire treasury operation from a company’s headquarters, forcing subsidiaries to cobble together Excel-based reports, a central treasury application is provided to all group companies to support their local day-to-day business in the best possible manner. This way, both account statements and payments can be automatically uploaded into the system at the local level, allowing all subsidiaries access to complete, real-time data. The latter is the prerequisite for running all global treasury operations, facilitating hedging, funding and an optimized distribution of liquidity based on the analysis of deviations between current and previous forecasts. Via a web-based application specifically designed for these purposes, the data is available anywhere, anytime and on any device ranging from desktop computers to mobile phones – without the need for installation. The concept of Load Balanced Treasury via a TMS thus transforms the seemingly impossible into a real possibility – empowering yesterday’s data collectors by turning them into today’s decision makers.

For more information on liquidity planning, watch our new video “On the Move With Mr. B” e03: The (Im)possibility of Liquidity Planning.

To learn more click here: liquidity planning in tm5.

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