Liquidity Improvement Methods

One of the simplest shifts I teach SMB owners: segment your cash into 3 buckets. Here’s why... “Do we have enough cash in the bank?” is the wrong question to manage your liquidity. One unexpected event, a delayed customer payment, a downturn, an acquisition opportunity, and you’re exposed. That’s why we coach clients to build a tiered liquidity strategy: 1. Operating cash. This is the cash you need to run day-to-day operations. It covers payroll, rent, vendors, taxes. We typically advise keeping at least 1–2 months of expenses here. Too little and you’re constantly stressed. Too much and you’re leaving money idle. 2. Emergency reserves. This protects against shocks: a major customer defaults, sales slow down, market shifts. For most SMBs, 3–6 months of fixed costs is a good target. 3. Strategic cash. This is your “offense” layer. Funds set aside for opportunities: buying a competitor, launching a new product, hiring a key executive. You’d be surprised how many companies miss out on great opportunities because they lack strategic liquidity. The key is to be intentional. Most businesses mix all their cash in one pile. That makes it hard to know what’s truly available for growth vs. survival. Segment it. Know your numbers. Build discipline around each tier. The companies that do this not only sleep better at night. They also move faster when opportunity knocks. Liquidity isn’t about having cash. It’s about having the right cash in the right place.

Navigating Maturity Spikes: A Strategic Approach to Liquidity Management Managing maturity spikes in funding is a critical aspect of effective liquidity management for banks. Such spikes occur when a significant volume of liabilities or funding sources are due for renewal or repayment at the same time, potentially leading to liquidity strain if not managed appropriately. Understanding and strategically addressing these maturity concentrations is essential for maintaining financial stability and ensuring ongoing operational resilience. The first step in managing maturity spikes involves accurate forecasting and monitoring. Banks must have robust systems in place to predict cash flow needs and identify potential maturity concentrations in advance. This foresight allows for the development of contingency plans to address potential liquidity shortfalls, ensuring that the bank remains prepared for various scenarios. Diversification of funding sources plays a crucial role in mitigating the risks associated with maturity spikes. By spreading funding sources across a variety of maturities and types, banks can reduce their reliance on any single source of funding, thereby enhancing their liquidity profile. This strategy involves a mix of short-term and long-term funding, as well as considering a variety of instruments such as deposits, bonds, and other borrowings. Active management of assets is another key strategy. Banks can improve their liquidity position by maintaining a portfolio of high-quality liquid assets (HQLA) that can be quickly converted into cash without significant loss. This portfolio acts as a buffer during periods of stress, providing the bank with additional flexibility to meet its liquidity needs. Moreover, engaging in proactive dialogue with stakeholders, including investors, depositors, and regulators, is advantageous. Transparent communication about the bank’s liquidity management strategies and stability can bolster confidence among stakeholders, potentially easing the pressure during maturity spikes. Finally, stress testing and scenario analysis are indispensable tools in the arsenal of liquidity management. By simulating various adverse conditions, including severe maturity spikes, banks can assess the robustness of their liquidity positions and adjust their strategies accordingly. This proactive approach ensures that banks are not only prepared for normal market conditions but are also resilient in the face of financial stress. In essence, managing maturity spikes in funding is a multifaceted challenge that requires a strategic and proactive approach. Through accurate forecasting, diversification of funding sources, active asset management, effective stakeholder communication, and rigorous stress testing, banks can navigate these challenges successfully. By prioritising liquidity management, banks can ensure their long-term stability and continue to serve their customers and communities effectively.

𝗧𝗵𝗲 𝗛𝗶𝗱𝗱𝗲𝗻 𝗥𝗲𝗮𝘀𝗼𝗻 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀𝗲𝘀 𝗚𝗲𝘁 𝗥𝗲𝗷𝗲𝗰𝘁𝗲𝗱 𝗳𝗼𝗿 𝗟𝗼𝗮𝗻𝘀—𝗔𝗻𝗱 𝗛𝗼𝘄 𝘁𝗼 𝗙𝗶𝘅 𝗜𝘁? Rejected for a loan despite strong revenues? The key issue is likely your balance sheet. Lenders prioritize stability, liquidity, and leverage over revenue. A solid balance sheet increases loan approvals and improves terms. Enhance your balance sheet to improve loan approval chances. A Real-World Example: How One Company Secured a Loan by Optimizing Their Balance Sheet: A mid-sized manufacturer couldn't secure a $5 million loan due to high debt-to-equity and low liquidity despite strong revenue. Instead of accepting rejection, they took action: -Cut liabilities by settling short-term debt -Improved supplier terms for better working capital management -Boosted cash reserves by improving inventory turnover After six months, they reapplied, secured the loan, and obtained better interest rates. 10 Strategies to Make Your Balance Sheet Loan-Friendly: 1. Maintain a Healthy Debt-to-Equity Ratio – Businesses with a healthy debt-to-equity ratio, staying below 2:1, are preferred by lenders. Reduce liabilities if your ratio is higher. 2. Optimize Asset Utilization – Enhance asset efficiency by selling idle assets, turning over inventory quickly, and fully utilizing equipment. 3. Improve Liquidity—A current ratio over 1.5 indicates good short-term obligation management. To improve liquidity, keep cash reserves and streamline receivables. 4. Enhance Profitability – A solid net profit margin indicates debt-servicing capability. Enhance this through cost control, strategic pricing, and efficient operations. 5. Reduce Accounts Payable, Accelerate Receivables—Strategically delay supplier payments and accelerate customer collections to create a lender-favored positive cash flow cycle. 6. Use Financial Technology – Adopt automated invoicing, cash flow forecasting, and digital payments to enhance transparency and efficiency. 7. Ensure Transparent and Updated Financial Statements – Businesses with precise and transparent financial records gain lenders' trust. 8. Build Strong Relationships with Banks and Lenders – Build relationships with banks early on, as consistent communication and transparency can benefit you. 9. Plan for Seasonal Cash Flow Fluctuations – Show how you handle cash flow during slow seasons and illustrate how the loan aids growth. 10. Ensure Regulatory Compliance—Update tax filings, licenses, and financial reports to build lender trust and minimize risk. Debunking a common myth regarding business loans: Myth: "Strong revenue guarantees loan approval." Reality: Lenders value stability, leverage, and liquidity more than revenue. High sales with high debt and low cash pose a greater risk than stable financial management. See your balance sheet as an investment to enhance loan prospects and drive growth. Faced hurdles in getting a business loan? Share your stories in the comments!

This week’s post focuses on improving cash flow for product-based MSMEs. Product-based businesses often grapple with cash flow challenges stemming from inventory management and payment cycles. Addressing these issues is critical to building a stable financial foundation. A few years ago, Samsung Electronics faced significant challenges managing inventory when demand for their smartphones dropped unexpectedly. Excess stock of Galaxy S5 devices tied up billions in working capital, putting pressure on their cash flow. At the same time, extended payment terms with suppliers created additional financial strain. These challenges highlight the risks of overstocking and misaligned payment cycles that many product-based MSMEs face. Challenges → Overstocking: Tied up working capital, with unsold inventory incurring storage costs and markdown risks. → Misaligned Payment Terms: Strained liquidity, forcing the company to find ways to cover operational costs. Solutions ✔️Dynamic Inventory Management: Samsung overhauled its demand forecasting models and implemented lean inventory practices to reduce overstocking risks. ✔️Renegotiating Payment Terms: The company worked closely with suppliers to align payment schedules with its cash inflow cycles. By optimizing inventory management and payment terms, Samsung not only improved operational efficiency but also stabilized its financial position. This serves as a valuable lesson for MSMEs in similar scenarios. Dos ✅ Use Data-Driven Forecasting: Align inventory levels with market demand to minimize overstocking risks. ✅ Build Transparent Supplier Relationships: Collaborate with suppliers to renegotiate favorable payment terms. Don’ts ❌ Overproduce Without Data: Avoid producing in anticipation of demand without robust data to back it. ❌ Overlook Hidden Costs: Do not ignore storage, insurance, and markdown costs tied to excess inventory. By adopting these strategies, MSMEs can optimize cash flow, reduce financial strain, and ensure long-term growth. Next week, I will focus on service-based MSMEs and share strategies to stabilize cash flow, focusing on payment cycles and revenue models. #CashFlowManagement #MSMEs #InventoryManagement #BusinessGrowth

Liquidity isn’t sexy. But it’ll keep you in the game. It won’t 10x your revenue. But it might save you from making a desperate decision when things tighten up. One of the most valuable frameworks I’ve started sharing with founders is what I call the Liquidity Ladder. Think of it like building rungs of access to your capital—with different levels of risk, reversibility, and return—across both your business and your personal life. Here’s how it works: 🔹 Rung 1: Operating Cash 30 days of expenses in checking—both business and personal. This is your daily oxygen. No thinking. No friction. Just pay the bills. 🔹 Rung 2: Emergency Fund 3–6 months in a money market account holding treasuries. Pays ~4%. Pullable in 24–48 hours. This is your “don’t panic” buffer when something breaks. 🔹 Rung 3+: Strategic Assets Real estate. Index funds. Long-term bets. Less liquid. More upside. But harder to unwind if you need to move fast. So why does this even matter? 𝗕𝗲𝗰𝗮𝘂𝘀𝗲 𝗹𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆 𝗿𝗲𝗱𝘂𝗰𝗲𝘀 𝗿𝗶𝘀𝗸. It keeps your options open. And it makes tough calls easier when things go sideways. You don’t need a fancy model to get started. Just ask yourself: ✅ How fast can I get to my cash? ✅ How hard is it to move it if I need to? ✅ What happens if I’m wrong? Most founders are overexposed in one direction. This helps you build stability—step by step.

The C.A.S.H Framework How do you improve CASH? Follow my framework: C - Collections Efficiency Quickly collecting receivables allows for immediate use of funds in operations, investments, or debt payment. How? • Implement an automated invoicing system. • Systematically follow up overdue payments. • Encourage shorter payment terms or early payments. A - Accurate Forecasting Forecasting helps anticipate liquidity needs and prepares you for situations that could strain cash reserves. How? • Use financial forecasting software. • Regularly adjust forecasts based on actuals. • Collaborate with sales, operations, and procurement for their insights. S - Streamlined Expenses Optimizing operational costs increases the available cash in your business. How? • Regularly audit expenses to identify inefficiencies. • Negotiate better rates or terms with suppliers. • Use cost-saving technologies or automation. H - Healthy Investment Wise investments contribute to future cash flow, and efficient inventory management frees tied-up cash. How? • Develop a process for evaluating investments. • Use just-in-time inventory management. • Regularly review and dispose of underperforming assets. 👉 Which framework or tactics do you use to improve your Cash? Save this post for later and share it around ;)

11 methods to optimize cash flow management A proactive approach to cash flow management is key to ensuring financial health and growth. Here are 11 methods to optimize cash flow within organizations: ▶ Accurate cash flow forecasting: Develop and maintain precise cash flow forecasts that project both inflows and outflows. ▶ Supplier payment optimization: Extend payment terms with suppliers and implement efficient AP processes to ensure timely payments. ▶ Customer payment management: Negotiate shorter payment terms with customers and implement a comprehensive AR policy. This should include defined billing, collection, dunning and processes for handling late payments. Additionally, review credit policies to reduce the risk of late or non-payments and establish credit limits for customers. ▶ Inventory efficiency: Minimize excess inventory and prevent overstock situations by implementing just-in-time inventory practices. ▶ Expense control: Continuously monitor and control expenses, identifying and eliminating unnecessary costs or finding more cost-effective operational approaches. ▶ Capex prioritization: Carefully assess and prioritize capital expenditures, focusing on investments that positively impact cash flow. ▶ Debt management: Analyze existing debt and explore opportunities for debt refinancing or restructuring to reduce interest costs and extend repayment terms. ▶ Asset evaluation: Evaluate underutilized or non-core assets that can be sold or leased to generate immediate cash. ▶ Optimized investments: Review the company's investment policies to ensure that excess cash is invested in instruments that provide an appropriate balance between safety and return. ▶ Collaboration: Foster collaboration with other organizational units to align cash flow objectives with operational goals. ▶ Cash reserves: Maintain adequate cash reserves to cover unexpected expenses or emergencies, reducing the need for short-term borrowing. Effective cash flow management is essential for financial stability and creating opportunities for future growth. By implementing some of these these methods proactively, organizations can ensure their financial health and readiness to invest in future endeavors. #financeoptimization #financialexcellence #financebusinesspartner #valuecreation #leadership #finance #financetransformation 

Aaron Ayusa has an excellent article. This is why I am excited about it. We at Baton Systems have been pleasantly surprised by the solid demand for our Core Payments product, where we normalize and orchestrate ALL wholesale payments of a bank irrespective of currency or product type and bring real-time visibility and control to the teams. Our customers' next set of organic demands has been to build actionable intelligence or AI on this. This is a time when everyone is an AI warrior on LinkedIn. Despite being a technologist, I consider myself a "Lazy Adopter" of "Fad Tech." But we jump on it when we find more than one use case where it can be applied to solve today's real problems. We are seeing that opportunity. That is, with actionable intelligence and real-time payments. It is a mouthful and still sounds too salesly. Here is what we are being asked to solve. Problem: Intraday liquidity is a big problem in a high-interest rate environment. Borrowing cash to meet intraday demand is now very expensive. How can we optimize intraday liquidity if you can access real-time information of exposures/obligations/counterparty positions/product positions/pay-in/pay-outs/netting/real-time status of cash and securities in transit and ETA to reach the destination? Now, if I can layer this with the cost of borrowing, can one be more optimal in intraday funding, and what does that mean to risk and profitability for a financial institution? How we approached it: This is where we use AI; again, forget the buzzwords. We build predictive analytics by learning from past (trend data) behavior and real-time information to predict balances, counterparty risks, and inbound and outbound payments by currency and product. By sequencing the inbounds and outbounds, one can schedule the payments algorithmically and optimally rather than wait for the end of the day to make all pay-outs or fund 50% of total obligations at the start of the day. How to make it actionable: This is still a work in progress, but we are leveraging the existing parts of our platform, like the dynamic rules engine and dynamic asser routing, to determine the best routes and venues to fund intraday payables. It is an exciting area where much can be done with better liquidity. Why is this important? (a). Short-term interest rates are going to continue to be high. It may come down in the medium term, but it will be higher than what we have been used to for over a decade (b). Emerging markets and currencies are seeing more demand (c) T+1 of US securities is a start - you will see more of this in the coming years, adding pressure to intraday funding (d). RTGS Systems will move to 24x6.5x365 (if not 24x7) (e) High Sovereign debts and demand are increasing beyond US treasuries, which will apply to securities and cash in the next five years. Status Quo is not an option now. It is time for smarter payments. https://lnkd.in/g2z7rZWG

Liquidity risk management is a critical aspect of financial management for businesses, financial institutions, and investors. It refers to the potential of not having enough cash or easily convertible assets to meet short-term financial obligations when they come due. Managing liquidity risk is crucial because insufficient liquidity can lead to financial distress, insolvency, or even bankruptcy. 💥 Types of Liquidity Risk: 👉🏼 Funding Liquidity Risk: This risk arises when a company or institution cannot obtain sufficient funds to meet its short-term obligations. It can be caused by sudden cash outflows, inability to access credit markets, or a mismatch between assets and liabilities. 👉🏼 Market Liquidity Risk: Market liquidity risk pertains to the ability to sell assets quickly without significantly impacting their market price. Illiquid assets can be hard to sell, causing losses if they need to be liquidated in a hurry. 💥 Liquidity Risk Measurement: 👉🏼 Liquidity Gap Analysis: This involves assessing the difference between cash inflows and outflows over specific time horizons to identify potential liquidity shortfalls. 👉🏼 Stress Testing: Stress tests involve simulating adverse scenarios to assess how an organization's liquidity position would fare under extreme conditions, such as a sudden market crash or a severe economic downturn. 👉🏼 Liquidity Ratios: Metrics like the current ratio (current assets divided by current liabilities) and the quick ratio (current assets minus inventory divided by current liabilities) help gauge an entity's short-term liquidity. 💥 Liquidity Risk Management Strategies: 👉🏼 Maintaining Adequate Cash Reserves: Building up cash reserves provides a buffer for unexpected liquidity needs. 👉🏼 Access to Credit Facilities: Establishing lines of credit or securing backup financing arrangements can serve as a safety net during liquidity crises. 👉🏼 Asset-Liability Management (ALM): Matching the maturity profiles of assets and liabilities can reduce liquidity risk. For example, long-term assets should be funded with long-term liabilities. 👉🏼 Diversification: Spreading investments across various asset classes and markets can enhance liquidity by increasing the chances of having assets that can be easily liquidated. 👉🏼 Regular Monitoring and Reporting: Continuous tracking of cash flows, liquidity metrics, and market conditions is essential to identify emerging liquidity risks. 💥 Challenges: 👉🏼 Predicting Liquidity Needs: It can be challenging to anticipate when and how liquidity needs will arise, especially in rapidly changing markets. 👉🏼 Costs: Maintaining high levels of liquidity can be costly, as it may limit investment opportunities and reduce returns. Anup Singh #liquidityrisk #riskmanagement #fundingliquidity #marketliquidity #liquidityanalysis #stressTesting #cashreserves #risk #businessstrategy #linkedin LinkedIn LinkedIn for Creators

Your cash isn’t gone... it’s just trapped. High receivables, slow collections, and short payables cycles are suffocating your liquidity. Here’s how to fix your working capital before it’s too late. ⬇️ Inefficient WC mgmt ties up cash that could be used elsewhere. Slow receivables, and tight payables windows cause liquidity strain. Improve cash efficiency by: + Accelerating accounts receivable: Offer early payment discounts, enforce stricter terms, and improve collections to free up cash faster. + Extending AP terms: Negotiating longer payment terms with vendors keeps cash in the business longer without hurting relationships. + Reducing cash conversion cycles: Align receivables, payables, and capital investment to minimize the gap between cash outflows and inflows. + Monitoring working capital ratios: Tracking key metrics like DSO and DPO ensures efficienc cash usage. Strong WC mgmt can be the difference between liquidity and a cash crunch. Manage it proactively.