The Benefits Of Efficient Corporate Liquidity Management

By Delfin Notele – Content Info Resource from business.hsbc.com.qa

Liquidity is indeed a crucial financial concept for any company in any industry. This pertains to the amount of cash it has on hand, or perhaps that it can generate for a short time frame. This is a significant indicator of the overall financial health of the company. It must be capable of settling debts easily or perhaps doing all of its financial obligations whenever a crisis arises.

During the recent global financial crisis, the need for efficient corporate liquidity management gained attention. The norm was for organizations to build a very strong relationship with just one banking institution that can manage their cash management and funding requirements. But the crisis showed just how serious the impact could be on enterprises when their banking provider collapsed, and how lending by such institutions could be cut short. Thus, corporate treasurers must rethink of their liquidity management strategies so they can efficiently reduce risk as well as optimize the cash they have.

Apart from that, corporate liquidity management concerns other important functions like dealing with credit lines, managing debt capacity, and using derivatives for hedging. The result them would be a higher level of financial flexibility that will allow companies to sustain their operations at the best possible level.

Benefits Companies Can Enjoy With The Right Liquidity Management Solution In Place

• Aggregated Balance – If the aggregate cash position increases in size, there will certainly be better interest terms.
• Stable Balance – The volatility of the overall net balance can be reduced when multiple accounts will be brought together in a bigger liquidity structure. This further means that unexpected cash flow events will be absorbed better and cash on hand can be distributed across investments a lot easier.
• Consolidated Balance – The cost of maintaining cash deficits and surpluses can be minimized, if not, eliminated.

But apart from these benefits, a company can likewise enjoy other perks. These include improved counterparty risk management, a decreased dependency on credit facilities, and better cost and time savings management.

Different Techniques For Efficient Corporate Liquidity Management

Cash Concentration – This is considered the highly recommend option under physical consolidation. This is otherwise known as zero balancing or physical cash pooling. It works by making transfers between the master account and subordinate accounts. Aggregating the balances physically is the purpose of this technique.

Notional Pooling – This is under notional balance consolidation. It works by making an interest calculation on designated accounts. This technique will help maintain the original ownership structure due to the fact that there is no physical movement of funds.

Interest Enhancement – This is also under notional balance consolidation. It is somewhat similar to notional pooling wherein there is no physical movement of funds. The difference is that this technique applies preferential pricing on various accounts based on pre-determined criteria, which is often based on a net aggregate balance threshold.