Market and economic volatility are intensifying treasury managers’ focus on liquidity management, highlighting its critical importance for every business. Here are five strategies companies can employ to promote greater visibility and access to liquidity in any economic environment.
Use regular relationship meetings to review and revise payment terms with customers and suppliers.
Here are two key internal questions organizations should be asking: Are your payment terms well-defined? And do they directly impact liquidity management in a positive way? “By taking a dynamic look at these questions, companies can better understand risks that are created through terms management,” says John Melvin, vice president, working capital consultant, at U.S. Bank.
Consider using discounts to give customers an incentive to pay you faster and negotiations around pricing and sales volume to encourage suppliers to give you more time to pay.
Work with customers to migrate them from paying you by check to using the growing variety of digital payment options, including traditional Automated Clearing House (ACH), Same Day ACH, card and some of the newer, faster payment channels such as Zelle®, The Clearing House RTP® network and the FedNow® Service, which the Federal Reserve launched in July 2023.
Receiving digital payments won’t necessarily mean the cash arrives faster — as customers may delay initiating digital payments to shore up their own liquidity — but it will mean you can recognize and post incoming transactions sooner.
From a buyer’s perspective, today’s instant payment alternatives allow you to pay suppliers on the due date, both giving you payment certainty and allowing you to maximize your trading partner’s liquidity.
Also, as a buyer, consider evolving your purchasing process by using a payments menu when working with suppliers. A payments menu offers your suppliers distinct combinations of payment methods and terms from which to choose. The menu allows suppliers to get the payment terms they want, but to receive those terms they must accept a particular payment method. The menu should include digital payment options in lieu of paper-based payments. For instance, a menu might offer 60-day terms if the supplier accepts an ACH, or 25-day terms if it accepts a virtual card.
A payment menu will help move suppliers to your preferred digital payment method or methods and enable you to take advantage of prompt payment discounts. The buyer also gets more predictable timing with payment settlement, which enables more efficient use of cash and investment of idle cash.
The intersection of legacy technology and new payment rails complicates corporate liquidity management. “As payment systems emerge and evolve, legacy platforms aren’t necessarily able to keep up with the changes,” says Mary Brause, senior vice president, deposit and liquidity products, at U.S. Bank. “This requires companies to bolt together old technology and new solutions.”
It’s important to adapt your liquidity management strategy to changing circumstances by employing new electronic tools, which can encourage tactical and strategic evolution.
“Companies can reduce costs when they integrate payment solutions with existing treasury workstations and ERP infrastructures,” Brause notes. “A central payments solution will include up-to-date security protocols and regulatory compliance modules and can take on all payment types.”
Deploying cloud-based ERP or treasury workstation solutions can connect cash flow planning tools with your company’s CRM and sales management systems. And dashboards are a powerful visual tool that provide leaders across the organization with meaningful cash flow metrics that reflect the strategic drivers of diligent cash flow management.
One risk of not having visibility into your cash flow is that you may be trapping cash and not even know it.
Companies across all industry segments experience trapped-cash scenarios, in many cases as a direct result of manual internal operational flow. “Manual processing can create limited visibility into transactions as well as the recognition of cash,” Melvin says.
“With greater visibility, you can better identify where trapped cash exists,” he says. “For example, company A sends company B a payment without remittance information. You can’t apply cash without this information, so it sits waiting for outstanding data, such as trade/credit availability, investment decisions, or liquidity availability. This forces company B to borrow unnecessarily.”
“Without visibility into your cash flow, you create liquidity risk,” Brause says.
In addition to effectively forecasting cash and managing seasonal cash flows, some techniques to address this risk include:
At any given time, a business might be in a strong cash position with few concerns about accessing liquidity. But economic cycles come and go, meaning for most companies, access to liquidity can tighten from time to time. Businesses employing these five strategies will be much better prepared to maintain access to cash when financial waters get choppy.
“Change is constant in liquidity management, and optimizing how you manage data, accept and receive payments and drive business processes will reflect directly on your bottom line,” Melvin says. “It’s important to have a 360-degree awareness of what’s going on around you and how it impacts your working capital and liquidity management strategies.”
Enhancing your liquidity management requires insight into the latest payments trends and innovations. Contact U.S. Bank for more information.
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