Liquidity Management: Best Practices for Banks

The world of liquidity management is much more complicated than it used to be.

The world of cash and liquidity management was once a simpler place. Access to capital was rarely a bottle-neck, even for highly-leveraged corporates, and many had strong, long-standing relationships with a single bank that helped meet most of their funding and cash management needs.

All of that changed with the global financial crisis of 2008-2009. Corporates around the world suddenly faced the backlash of the solvency of banks, the impact on their businesses if a banking provider collapsed, and the reigning in of lending to businesses by banks. These new challenges triggered a radical reshaping of the corporate treasury landscape and the way that corporates interacted with banks.

Challenges of a Multi-Banking Model

The crisis ultimately catalyzed corporate treasurers to make a concerted move towards a multi-bank model. This change is now at heart of best practice within the marketplace. While the shift provides ample opportunity for corporate treasury functions to reduce risk and optimize cash, it too presents new challenges.

For corporate treasurers, the challenges raised by a multi-bank banking model tend to vary with the size of the business. For the largest and most sophisticated corporates, the main problem is gaining visibility into multiple accounts run by subsidiaries in different countries using a variety of currencies, and then leveraging that visibility to optimize cash and working capital globally. For smaller corporates, the challenge is more around tracking payments being received into multiple banks, and reconciling them against invoices in order to manage cash flow and liquidity.

Best Practices to Address Corporate Liquidity Needs

For banks to remain a valued partner to corporate customers, they must set out to navigate today’s reshaped corporate liquidity management landscape. The following outlines eight best practices that banks should bear in mind when developing and offering corporate liquidity solutions.

Implementing a Centralized or De-centralized Model:

Improving Cash Forecasting to Enhance Liquidity Management:

A critical requirement of today’s corporate treasurers is timely, accurate and consolidated information to facilitate cash forecasts. Banks should look to offer cash management solutions that ensure this information is made available centrally to their corporate customers.

Offering Balance and Information Reporting to View Aggregate Balances across Banks:

Comprehensive balance and transaction reporting helps a bank’s corporate customers improve their cash flow management and monitor their payables and receivables more effectively.

Focusing on Receivables and Payables to Enhance the Cash Position:

Banks can now offer corporate customers a wide range of payables and receivables solutions that help them improve the speed, efficiency and effectiveness of their working capital management.

Providing Real-Time, Multi-Bank Liquidity Information to Support Liquidity Optimization Leading:

Liquidity optimization solutions will provide banks with the capability to deliver intra-day liquidity information to their corporate customers in real-time, enabling them to manage cash flows, credit facilities and working capital quickly and responsively across multiple accounts and subsidiaries.

Enabling Visibility Along the Entire Supply Chain:

Cash management solutions should help corporates manage their financial supply chains by enabling corporates and banks to connect electronically with their trading partners to exchange and share transaction-related documents and information all the way along the supply chain.

Applying Advanced Liquidity Management Techniques:

There are several advanced techniques for liquidity management that banks can offer as part of their corporate solutions portfolio, including physical balance consolidation and notional balance consolidation.

Leveraging Channel Enablers:

Advances in technology, including integrated electronic banking solutions for cash and liquidity management and mobile and tablet services, present banks with opportunities to offer corporates new services to boost automation and STP.

Corporates now, more than ever, need to maintain visibility across cash at various banks and in multiple accounts, often run by subsidiaries in different countries and denominated in a variety of currencies. They also must be able to optimize and pool liquidity across accounts in order to optimize interest rates and costs while ensuring funds and working capital are available in the right place at the right time.

At root, effective and efficient management of liquidity and working capital has become a core capability of all corporates, and now, more than ever, banks need to adapt by prioritizing best practice liquidity management.

Gil Gadot is President, Asia-Pacific and Head of Global Cash Management and Sanjay Dalmia EVP, Global Cash Management with Fundtech