The Growing Importance of Liquidity Management Solutions

Much of the value of a business is tied up in investments and assets like equipment, inventory, and real estate. However, to survive and grow, all businesses need liquidity- easy access to cash for day-to-day business expenses and short-term investments. 

Liquidity management: What Is It?  

Liquidity management can be defined as strategies and processes that ensure your business can access cash as and when needed. It can also be described as your business’s ability to meet financial requirements through capital management, cash flow, or funding activities. 

All businesses must have a liquidity management strategy to meet their immediate financial obligations without incurring significant losses. A proper strategy ensures that your business efficiently manages its assets, and at the same time, has access to cash to cover expenses, meet liabilities, and maintain financial stability. 

The Growing Importance of Liquidity Management 

Technology has greatly influenced the corporate landscape and the way businesses function globally.  

As businesses continue to expand in new markets, I see an extra burden is being put on corporate treasurers to find new ways to gain efficiency in their treasury management. For banks to remain the first choice for corporate clients, it’s imperative that they respond with digital solutions that can deliver intra-day liquidity information to corporate clients in real-time.   

After researching dozens of banks in the UAE that provide liquidity management solutions, I’ve found Abu Dhabi Commercial Bank (ADCB)to be at the top of the listwith an array of tailored liquidity management services that help corporate customers to manage cash flows, credit facilities and working capital quickly and efficiently across multiple accounts and regions. 

Liquidity Management in Business 

Stakeholders in a business look at financial statements to evaluate liquidity risks. Companies that have higher debt obligations than their cash in hand must take appropriate steps to lessen the gap. Such companies are at a much higher liquidity risk since they are unable to move their assets around. 

 A corporate liquidity management plan will ensure that money moves across and between different bank accounts instead of pooling in one place. Companies can get a more transparent view of liquidity and gain better control over cash flow globally. 

Liquidity Management In Investing 

Investors and traders manage their liquidity risk by investing more in highly liquid markets and less in illiquid markets. Illiquid assets are those that can’t be exchanged at the current price. Hence, investors and high-volume traders prefer to invest in forex currency or commodities with high trading volumes like gold and crude oil. 

Liquidity Management Is All About Streamlining and Centralization 

So, how does liquidity management work? Generally speaking, liquidity solutions work primarily on two concepts:  Pooling and Sweeping.  

Pooling 

Notional Pooling is an arrangement for virtually netting balances across a group via central treasury platforms. It allows for calculating interest on the combined credit and debit balances of the accounts of all those companies which are part of the pooling arrangement, without transferring any funds between their accounts. 

Sweeping 

A sweeping system moves cash from a company’s outlying bank accounts into a central account, from which it can be more easily invested. To maximize yield on the corporate’s daily cash, sweeping helps treasurers to have visibility into global holdings, so they can make better management decisions, maximize returns on extra cash, and save on interest.  

Conclusion  

In the past, corporate banking solutions were largely meant for large enterprises, but today they are relevant to companies of all sizes. Globalisation has empowered even small businesses to go far and wide, creating a need for new ways to manage their money across accounts and subsidiaries.  That being said, banks need to make sure their liquidity solutions can meet the needs of corporate treasurers in different market conditions.