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How to Do Cash Management with Liquidity Solutions?11 min read

How to Do Cash Management with Liquidity Solutions?11 min read

Reading Time: 5 minutes

Cash management, in other words, cash positioning is a critical aspect of financial control for businesses for daily operations with several tactics and strategies to maximize effectiveness by liquidity and returns. Liquidity planning is a strategic way for cash management.

Cash and liquidity management differ from each other by their time horizon and primary focus; while cash management is a short-term operation that uses bank accounts, cash payments, and cash pooling as tools, the other one is crucial for long-term financial strategy through cash flow planning, analysis, and forecasting.

Maintaining a healthy financial position is essential to boost profitability and pay for unforeseen expenses like supplier payments and operations costs.

Effective cash management using liquidity solutions involves a few stages. Businesses can solve their financial issues by implementing these procedures. It is important to remember, nevertheless, that different techniques apply based on the sector and the nature of the business.

How Do You Manage Cash and Liquidity?

Cash is an asset that can be liquidated quickly if needed. As a result, managing short- and long-term cash and cash-like requirements is part of liquidity management.

Cash management helps businesses to use their liquidity more efficiently, optimize return on investment (ROI), and reduce sensitivity to monetary disruptions by controlling the short-term cash situation. The purpose of liquidity management is to use cash flow planning and forecasting to manage the company’s long-term cash flows.

Several actions necessary for the cash visibility of the enterprise to overcome financial difficulties and make strategic financial decisions are part of the cash and liquidity management process. Cash forecasting, managing financial risks, regulating cash inflows and outflows, and investing excess cash are related responsibilities.

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cash management

What Strategies Can Be Used to Manage Liquidity?

There are 10 basic tactics for companies to manage liquidity efficiently. These tactics are presented below:

Cash flow monitoring: It is of critical importance to monitor and evaluate the company’s cash flow by examining the income statements, balance sheets, and cash flow statements. Supports the financing and investment decisions of the enterprise.

Forecasting: If you can make accurate forecasts of fund inflows and outflows for your business, you can meet possible cash demands and surpluses. Budgeting is very important in terms of determining the financial activity roadmap. Thanks to the accurate cash flow forecast, it can manage the budget efficiently and manage debt obligations, investments, daily operations, etc. You can meet cash needs for financial activities.

Working capital management: Cash flow forecasts provide organizations with an idea about their future projections and provide the information necessary to create the basis for working capital management. With the right amount of working capital, businesses can operate daily without worrying about running out of money.

Liquidity risk management: It is significant to understand potential cash flow risks because of industry and economic changes or regulative changes in the future. Being informed about the potential affect of the risk on the businesses and acting like creating a strategy is important to protecting the fund.

Redundancy and expense management: It is not that hard to increase cash flow and profitability by reducing the amount of manageable costs without compromising service quality. However, managing surplus cash by analyzing short-term investment options can reduce cash flow risks and provide the necessary liquidity.

Credit Management: Creating a clear credit policy lets businesses evaluate the creditworthiness of customers and suppliers.

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Emergency Fund/ Cash Preservation: Holding a back up fund to compensate for unexpected payments and periods of reduced revenue is another key step for cash management.

Regular review and optimization: Regularly assessing the cash flow strategies against changing conditions helps businesses to create more appropriate negotiations with their partners. With the correct strategies, you can have higher interest rates for your investments and lower interest rates for borrowings.

Bank relationship management: Keeping an open relationship between banks is a very essential thing that you should consider. This will be good especially for financial changes and needs.

Technology and automation: The last point is using efficient payment systems and financial software to automate and control receivables and payments.

cash management

What is the Method of Cash Management in Liquidity Solutions?

Companies need to be able to pay off their short-term debts and pay their daily operating expenses with an effective liquidity management strategy. You need to keep in mind that liquidity management for existing cash involves monitoring, regulating, and optimizing liquidity levels.

We have a couple of strategies for Liquidity solutions:

Cash reserve: One of the most important tools for managing liquidity is to have a sufficient amount of cash. The cash reserve should close the gap between your current expenses.

Predicting cash flow: Businesses should first collect data from the bank or through digital banking. According to the data, you should consider the external and internal scenarios like when you receive the payments, when your payments are due and create a forecast for potential liquidity gaps and adjust for corrective actions.

Credit management: Credit management is one of the global liquidity solutions since it helps businesses have more time to pay bills with favorable credit terms with suppliers or banks.

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Short-term financing: You can compensate for temporary liquidity shortages by using profitable agreements with your bank. You can utilize short-term financing options like bank overdrafts, credit options, or short-term loans.

Investment and surplus funds: Investing excessive cash in short-term and high liquidity options helps businesses optimize their available funds.

How Can a Business Improve Liquidity by Managing Cash?

In recent years researchers say that companies are faced with a challenge in cash flow management because they bind more money in inventory stock and as a result, it affects their profitability. However, businesses can improve their liquidity with an accurate and optimized cash management system. 

Increasing revenue and controlling expenses with true tactics will increase the profitability of the businesses. If you automate the cash management process, it will both save time and money in the end efficiency of the business. By using digital banking systems, you can automate this process.

Cash Management in Business with Liquidity Solutions

As a business or company owner, you can avoid liquidity risks by practicing these steps above. Many global banks offer liquidity solutions for businesses to manage their cash effectively and avoid liquidity risks. Banks use cash flow forecasting tools for cash management in digital banking. It may raise the question of which bank is the best digital bank for cash management. The Kingdom Bank enables its customers to use their digital banking platforms in cash management. For more information about their offers and services, contact their customer support or website.

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