LIQUIDITY ACTION PLAN: no news, good news

We used to hear the expression “Cash is King”. After all, with the COVID 19 crisis, we learned that “Cash is God”. This article will help you prepare your liquidity action plan and answer the question, “where is my cash”

Finance and treasury teams played a key role in managing the COVID 19 crisis by ensuring the liquidity necessary for the functioning of companies and the economy. When they work well, they are hardly noticed. And for that to happen, the timely planning of sources of cash generation with sufficient safety margin is essential for the timely settlement of responsibilities. This exercise is summarized in the Liquidity Action Plan. Banks are already used to manage liquidity risk and one of the regular metrics they provide to regulators is the Liquidity Coverage Ratio (LCR). Companies do not yet have liquidity-related compliance requirements, but the COVID 19 crisis has accelerated the implementation and enhancement of these mechanisms for financial and treasury teams.

How to prepare a good Liquidity Management Plan? Everything depends on the quality of its components that are the following:

• Reliable cash flow forecasting,
• Awareness of that treasury teams about the desired risk profile for the organization,
• Technology applied in cash management,
• Scenario analysis.

Cash flow forecasting and liquidity management

Reliable cash flow forecasting is key for liquidity and debt management, in addition to other purposes such as hedging foreign exchange risk and managing counterparty risks. Short-term forecasts can range from 12 days to 13 weeks and aim to ensure that the minimum cash reserve is maintained to deal with unexpected events. This periodicity improves the visibility of cash and the mapping of cash drivers. Cash-flow forecasts made by treasury teams follow the direct method (receipts minus payments), unlike those prepared by FP&A (“financial planning & analysis”) teams that tend to adopt the indirect method (based on balance sheet and income statement). The method usually applied in liquidity management plans is the direct method because it provides greater visibility about cash-generating events. However, according to a survey by Redbridge (2019), 60% of the surveyed companies said they reconciled the results of both methods.

Liquidity management goes beyond cash issues. It also aims to reshape the financial structure of the company to the strategic repositioning of the business, rethink the investment plan and articulate the mergers & acquisitions strategy. Time horizon of medium and long term forecasts can be extended from 2 to 5 years.

According to a Redbridge survey (2019), 40% of respondents reported that cash-flow forecasts differ by more than 10% from current results. This discontent can be attributed to the scarce automation of information collection and analysis processes.

Cash flow and debt

Liquidity management in conjunction with debt is fundamental to manage the financial risk profile, usually materialized in a specific rating for both the company and issued securities. Cash-flow forecasting anticipates highs and lows of cash generation and the best decisions, either for covering funding needs (issuing short-term debt or drawn down credit lines) or investing surplus funds. In connection with debt management, the inevitability of renegotiating financial covenants may arise.


The COVID crisis brought for the top of financial management agenda the importance of the circulation of "cash" between bank accounts, the possibility of intra-group transfers and "cash-pooling", and the importance of automating these processes.

Financial risk and scenarios

In view of the growing uncertainty of macro-economic scenarios and the weekly update of liquidity action plans, the success of liquidity risk management lies in the ability to set up simulation universes separated from the production universes for testing and validating of hypotheses. Modern technology gives treasury teams total autonomy of action for the execution of scenario analysis without the need for IT support.

The quality of liquidity management and cash management are inextricably linked to the technology available to Finance and Treasury teams.
Technology contributes to the modernization of the treasury through the implementation of collaborative platforms dedicated to the management of financial risk with access to large “lakes” of data. The integration operated by Treasury Management Systems (TMS) with existing ERPs (as a rule they are “reporting” tools) allows automatic access to updated information for accounts payable and receivable and payroll costs (only to mention a few). In turn, “application programming interfaces” (API), enable communication between systems and the instant updating of bank balances and information on bank transactions after automatic reconciliation and matching with the TMS data .

According to the survey carried out by ACT (between January and February 2020), 87% of organizations are considering investing in the automation of treasury activities, contrary to what happened to date, where these investments were concentrated in high volume areas, such as “accounts payable”. Finally, the areas where most treasury teams would like to see more investment in technology are TMS (Treasury Management systems), systems integration and automation.

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