BENEFITS OF REAL TIME LIQUIDITY MANAGEMENT
Effective liquidity management means optimising cash, minimising idle cash, reducing debt, and putting funds to work and investing elsewhere. If cash is kept in disparate locations, organisations may be holding onto a larger liquidity buffer than is necessary.
By gaining visibility of where their cash is – in real time — and streamlining their payables and receivables, treasurers can optimise their liquidity and reduce their reserves. There is an opportunity cost to keeping such a buffer, and if cash is freed up it can be put to better use elsewhere. A lack of real time visibility of cash has meant that organisations have been forced to borrow to cover their obligations, despite having cash sitting in an account somewhere else. Even in a real time environment — such as with instant payments — if there is a lack of historical data by which to allocate liquidity, treasurers could be overfunding their positions. For many treasurers in financial institutions, the management of collateral for pre- funded instant payments could be more efficient, particularly as they have tended to have a larger buffer than necessary to cover the real time payments that occur outside office hours. More sophisticated analytics is hence required to maximise the potential of real time.
I think that shifting toward active liquidity management carries benefits that include improved profitability, greater operational efficiencies, and the potential for new revenue streams.
Sound liquidity management also helps ensure the availability of funds to meet all cash outflow commitments for day-to-day operations and deploys cash in an optimal manner. It allows for managing cash on a global level for the purpose of minimising idle cash, reducing external debt, and optimising returns on excess cash by grasping better investment opportunities. Effective liquidity management can also be used as a tool for customer service. Poor management, where an organisation is left with insufficient funds when bills need to be paid, for example, leads to an erosion of reputation and build-up of client resentment. This trend can be reversed by optimising liquidity and creating a virtuous cycle where payments are treated as a tool for client satisfaction. Through visibility and active management of payables and receivables, a treasurer can have certainty that the most important transfers will be made on time.
Fund transfers can be prioritised in other ways. Payables, for example,
could ‘follow the sun’ and be paid according to the time zone they belong to. Or payments could be prioritised by currency and timed to when foreign exchange rates are the most favourable. Real time liquidity management also reaps benefits in reducing foreign exchange risk. If managing currencies only happens at the end of the day, there is an exposure to the exchange rate fluctuations — a risk that can be averted by handling currencies in real time.
Greater visibility can give treasurers an edge and insight into their organisations. For bank treasurers and chief financial officers, for example, they could see which of their customers are using liquidity and facilities.
Or, if clients are late paying, analytics could be used to determine exactly how much the late payments cost an organisation. Furthermore, improved analytics can also show the patterns of payment behaviour and make it possible to predict the likelihood of receivables being on time, thus giving more certainty to treasurers when planning ahead. If the analysis is based on real time data, it is more accurate, more up to date, and improves the ability to respond to unforeseen circumstances quickly. This could be a differentiator in a global crisis.