Four Principles To Improve Your Liquidity Management Structure

Preparing for the Future.

As once stated by Yogi Berra, “The future ain’t what it used to be.” That’s particularly true in the treasury and finance function. To survive today’s economy and thrive into the future, finance execs will need to “future-proof” their finance function. One key to this goal is a robust cash and liquidity management structure that enhances your firm’s working capital position.


Four principles should guide finance execs as they try to improve their liquidity management structure.


a) Corporate liquidity should not be put at risk. That means thoroughly examining investments, rather than relying on rating agencies to do the job. It also requires working with well-capitalized banks.


b) Forecasts should cover both actual and potential cash needs. That means “stress testing” the levels of working capital needed to cover even extreme but plausible scenarios. Examples include a dramatic drop in sales or drastically shorter payment terms.


c) Investment guidelines should be appropriate and regularly reviewed. Determine the maturity levels make sense for your investment time horizons, and implement any restrictions needed, such as the maximum exposure for each counter party.


d) Funding sources should be tested and diversified. In difficult times, another valuable lesson to be learned is not to rely on a single source for funding And, you want to make the most of the cash you generate internally. That may mean simplifying your banking structure to minimize liquidity fragmentation and enhance self-funding opportunities.