In any economic climate, cash flow remains the lifeblood of an organisation. For corporate treasurers, effective cash and liquidity management isn’t just an operational task; it’s a strategic imperative that underpins financial stability, supports growth initiatives, and provides a crucial buffer against uncertainty. While long-term transformations are vital, there are often actionable strategies treasurers can implement or refine relatively quickly to unlock hidden liquidity and optimise cash flow within the current quarter.
This article from The Global Treasurer explores five such practical strategies designed to make an immediate impact on your organization’s cash position.
1. Sharpen Your Cash Forecasting Accuracy
Accurate cash flow forecasting is the bedrock of effective liquidity management. A reliable forecast allows treasurers to anticipate funding needs, optimize borrowing, identify surplus cash for investment, and make informed strategic decisions.
- Why it matters now: Increased market volatility makes historical data less reliable. A more dynamic and accurate forecasting process is essential.
- Actionable Steps:
- Shorten Horizons, Increase Frequency: While long-range forecasts are important, focus on improving the accuracy of short-term (e.g., daily, weekly, 13-week) forecasts. Increase the frequency of forecast updates.
- Collaborate Across Departments: Engage more closely with sales (for revenue projections), procurement (for payables), and operations to gather real-time insights that impact cash inflows and outflows.
- Leverage Technology: Utilize your TMS or dedicated forecasting tools. Explore AI/ML-powered solutions that can identify patterns and improve predictive accuracy, especially for businesses with complex cash flow dynamics.
- Variance Analysis: Regularly compare actual cash flows to forecasts. Understand the drivers of variances and use these insights to continuously refine your forecasting models and assumptions.
2. Streamline Accounts Receivable (A/R) & Collections
Accelerating the conversion of sales into cash directly boosts liquidity. Even minor improvements in Days Sales Outstanding (DSO) can free up significant working capital.
- Why it matters now: Economic pressures can strain customer payment behaviors, making proactive A/R management critical.
- Actionable Steps:
- Review Credit & Payment Terms: Ensure credit policies are appropriate for the current environment and that payment terms are clearly communicated and consistently enforced. Consider offering small, early payment discounts where economically viable.
- Automate Invoicing & Reminders: Implement or optimize e-invoicing solutions to reduce delays. Automate payment reminders for upcoming and overdue invoices.
- Proactive Collections: Don’t wait until invoices are significantly overdue. Establish a clear, tiered collections process with early, courteous follow-ups. Segment customers based on risk and payment history for targeted collection efforts.
- Offer Flexible Payment Options: Make it easy for customers to pay by offering multiple payment methods (e.g., ACH, cards, digital wallets).
- Dispute Management: Implement a swift and efficient process for resolving invoice disputes to prevent them from delaying payments.
3. Optimize Accounts Payable (A/P) & Days Payable Outstanding (DPO)
While indiscriminately delaying payments can harm supplier relationships, strategically managing payables and optimizing DPO can be a valuable source of short-term liquidity.
- Why it matters now: Balancing your own liquidity needs with maintaining strong supplier relationships is key.
- Actionable Steps:
- Centralize AP Processing: If not already done, centralizing A/P can improve control, visibility, and efficiency, allowing for better management of payment timing.
- Negotiate Payment Terms: Where possible, negotiate favorable payment terms with key suppliers, especially for new contracts.
- Strategic Payment Scheduling: Utilize payment terms fully without exceeding them. Schedule payments closer to their due dates, considering your cash forecast. Avoid unnecessary early payments unless a significant discount justifies it.
- Explore Supply Chain Finance (SCF): For larger organizations, SCF programs can allow you to extend payment terms while offering suppliers the option to receive early payment from a financing provider, benefiting both parties.
- Review Payment Methods: Transition from cheques to more efficient and often lower-cost electronic payment methods (e.g., ACH, virtual cards) which can also offer better control over payment timing.
4. Mobilize Trapped or Idle Cash
Many organizations, particularly those with global operations, have cash sitting in various accounts or entities that isn’t being efficiently utilized. Mobilizing this trapped or idle cash can significantly improve overall liquidity.
- Why it matters now: Centralized liquidity provides a better buffer and reduces the need for external borrowing.
- Actionable Steps:
- Enhance Cash Visibility: Ensure you have a clear, real-time view of all bank account balances across all entities and geographies. Leverage your TMS or bank portals for this.
- Implement/Optimize Cash Pooling Structures: For multinational corporations, physical or notional cash pooling (where regulations permit) can centralize liquidity, offset debit and credit balances, and reduce borrowing costs. Review existing pooling structures for efficiency.
- Streamline Intercompany Lending/Borrowing: Establish clear policies and efficient mechanisms for intercompany funding to ensure cash can move where it’s needed most within the group.
- Review Bank Account Structures: Rationalize unnecessary bank accounts to reduce fees, simplify management, and concentrate cash.
5. Strategically Leverage Short-Term Investment & Borrowing Facilities
Once cash is optimized and forecasts are reliable, making informed decisions about investing surplus cash or utilizing borrowing facilities efficiently becomes crucial.
- Why it matters now: Fluctuating interest rates and credit conditions require a more active approach to managing surplus cash and borrowing costs.
- Actionable Steps:
- Define an Investment Policy: Ensure your short-term investment policy is current, clearly defining approved instruments, counterparty limits, and risk appetite (prioritizing capital preservation and liquidity).
- Optimize Yield on Operating Cash: Explore options like money market funds, short-term deposits, or treasury bills for operational cash that exceeds immediate needs, always within your policy guidelines.
- Review Borrowing Facilities: Understand the terms, conditions, and costs associated with all available credit lines (e.g., revolving credit facilities). Ensure these facilities are adequate for potential needs but avoid unnecessary commitment fees.
- Minimize Borrowing Costs: Use accurate cash forecasts to draw down on credit facilities only when necessary and for the shortest possible duration.
Monitoring and Key Performance Indicators (KPIs)
Optimizing cash flow isn’t a one-time project; it requires ongoing attention. To sustain improvements:
- Track Key KPIs: Regularly monitor metrics such as:
- Cash Conversion Cycle (CCC)
- Days Sales Outstanding (DSO)
- Days Payable Outstanding (DPO)
- Cash Forecast Accuracy
- Working Capital Ratio
- Cost of Borrowing vs. Return on Short-Term Investments
- Regular Review Meetings: Hold periodic meetings with relevant stakeholders to review performance against these KPIs and identify areas for further improvement.
By implementing these actionable strategies and fostering a cash-conscious culture, treasurers can make significant strides in optimizing cash flow, enhancing liquidity, and bolstering their organization’s financial resilience—not just for this quarter, but for the long term.
