Liquidity planning takes cash forecasting to the next level by harnessing APIs, AI and data analytics to make the forecasting process more efficient and enable real-time scenario modeling.

While the result is better decision-making across the organization, the real benefits of a liquidity management approach come from measurable improvements in business outcomes, including the following.

Free cash flow and setting relevant targets

Liquidity planning will generate valuable insights that can be shared with the rest of the organization. This will help departments to make efficiencies within the cash conversion cycle, ultimately leading to improved cash flow. Armed with these deeper insights, the liquidity plan can also help company leadership set KPIs and other targets for individual teams and business units that align with the overall business strategy.

Balance sheet efficiencies

As interest rates rise, the cost of holding cash rises too, whether the company is cash rich or a net borrower. In general terms, treasurers want to minimize their exposure to rising rates. The most effective way to do so is to reduce the organization’s borrowing requirement, especially by paying down any floating-rate debt. However, while it may be possible to reduce borrowing today, the treasurer will want to be confident that the company will not be faced with a future borrowing requirement when they could be forced to borrow at a higher rate. A liquidity planning approach will model future scenarios, giving the treasurer a degree of confidence when determining whether to pay down debt.

Increased return on cash

Because the liquidity plan provides more confidence in the timing and volume of future cash flows, companies can reduce the levels of cash held for precautionary purposes. Cash can be segmented to avoid the need for daily redemptions and reinvestment, a wider range of investment instruments can be accessed (subject to investment policies), and redemption periods can be laddered (so cash doesn’t need to be reinvested at once). This approach will also help to ensure diversification in the portfolio, minimizing counterparty risk.

Protecting financial statements

Having a clearer view of liquidity over time will help ensure appropriate strategic decisions are made by considering the full impact on cash flow. This will feed a more strategic use of the balance sheet when raising finance and help to ensure an efficient capital allocation. Critically, when strategic decisions are being made, decision-makers will have access to aggregated granular data and models to anticipate the impact of those decisions on the financial statements. Notably, this data will help to identify times when key ratios may be at risk, thereby avoiding the need for emergency action to, for example, retain access to certain funding streams or to protect the company's credit rating.

Access to more levers to execute corporate actions

From a strategic perspective, liquidity planning will help companies retain as much flexibility as possible, so as to be in a position to take advantage of strategic opportunities when they arise. Liquidity planning will help company leadership understand the short- and long-term impacts of any proposal on the company’s cash flows, its financial ratios and balance sheet. Modeling will also help sell the decision to external stakeholders, including shareholders and investors, as well as credit rating agencies.

Want to learn more? Read the 2023 AFP Executive Guide: Rethinking Liquidity Planning to Manage the Cash Lifecycle, underwritten by Kyriba.