How to get started with liquidity management planning?

Liquidity management is for cash control

Can your company meet its operating expenses, like lease payments, utilities, or insurance? How much cash should your business hold at any given time? How can the business optimize its cash conversion cycle? Should the business seek external financing? All important questions. All questions liquidity management planning can help to answer. Let’s explore:

Meet the experts 

Effective liquidity management is crucial for the financial health and operational stability of any business. I had the great honor of sitting down with Nomentia's experts, Karl-Henrik Sundberg and Jouni Kirjola, to discuss the ins and outs of liquidity management. Their combined knowledge and experience made the importance of forecasting cash inflows and outflows and monitoring liquidity levels for making informed financial decisions as clear as day. As part of optimizing the balance between risk and profitability, liquidity management planning directly impacts how well a business runs its daily operations, manages financial risks, and seizes growth opportunities. 

Karl-Henrik Sundberg

Karl-Henrik Sundberg is a Senior Product Manager for Cash Forecasting at Nomentia, with nearly a decade of experience at the company. He brings valuable expertise from his prior roles as Director of Group Cash Management and Back Office in a Corporate Treasury, as well as in cash management software. 

Jouni Kirjola

Jouni Kirjola is the Head of Solutions and Presales at Nomentia, bringing nearly 20 years of expertise to the role. Specializing in payments, cash forecasting, in-house banking, and reconciliation, his extensive experience and deep knowledge of financial solutions make him a key expert in delivering tailored solutions.

Liquidity management planning: what is that? 

To start: What is liquidity? That’s the question, right? To get all dictionar-y on you: Liquidity refers to the ability of an asset or a company to be quickly converted into cash without significantly losing value. In simpler, more concrete terms, liquidity is a measure of how easily and efficiently something can be turned into cash to meet immediate needs or obligations.

"Liquidity management is the foundation of a company's financial health. Without a clear understanding of where your cash is, even the most profitable businesses can struggle with day-to-day operations." – Jouni Kirjola, Head of Solutions & Presales

There are two main types of liquidity: 

• Asset Liquidity – This refers to how quickly an individual asset can be converted into cash. Highly liquid assets include cash, bank deposits, and marketable securities, while assets like real estate and machinery are less liquid. 
• Corporate (or Business) Liquidity – This focuses on a company's ability to meet short-term obligations without raising additional capital. Cash, accounts receivable, and other readily convertible assets contribute to corporate liquidity, enabling financial stability and flexibility to respond to opportunities and unexpected expenses. 

Benefits of liquidity planning  

Liquidity management planning is a strategic process to ensure a business has enough cash and liquid assets to meet its short-term obligations, like payments to suppliers, employees, and creditors. Beyond covering day-to-day needs, it also prepares the business for unexpected challenges— economic downturns, natural disasters, supply chain issues, or regulatory shifts.

On the upside, effective liquidity management also allows the business to seize sudden opportunities, like investing in new technology or acquiring competitors. Sounds important, right? It is and for a good reason. Because well-planned liquidity: 

1. Helps to avoids cash shortages: Liquidity management planning ensures that the business always has enough cash to meet its immediate needs and avoid disruptions, like delayed payments to suppliers or employees. 
2. Reduces borrowing costs: By managing liquidity efficiently, a company can minimize reliance on emergency borrowing, which often comes with high interest rates. 
3. Supports investment decisions and strategic growth: Good liquidity planning allows companies to seize investment opportunities without risking cash shortfalls. 
4. Ensures business continuity: Maintaining sufficient liquidity allows companies to address sudden and unforeseen expenses without causing operational interruptions, which can affect production, delivery, and customer relationships. 
5. Prepares for economic fluctuations: Liquidity buffers help businesses weather external financial shocks, like recessions, regulatory changes, or industry downturns. 
6. Operational efficiency: By ensuring sufficient cash flow, liquidity management allows businesses to run smoothly without interruptions in day-to-day activities. 
7. Long-term stability: Effective liquidity planning enables companies to build financial resilience and allows them to invest in growth opportunities and withstand economic challenges over time.

Challenges in liquidity management

"The complexity of liquidity management grows with the scale of the business. More regions, currencies, and business units mean more variables to track, and without an integrated plan, things can quickly spiral out of control." – Karl-Henrik Sundberg, Product Manager, Cash Forecasting

For quite a while now, liquidity management has been recognized as the key concern among corporate treasurers. For a good reason. Even discounting the seismic disruptions in the global marketplace in recent years, a number of things can have a great effect on liquidity. For example:

Uncertainty in cash flow

When it comes to cash inflows and outflows, there’s no escaping unpredictability. Sales can, and often do, fluctuate. Unexpected expenses occur, and payments from clients get delayed. Just imagine a mid-sized fashion brand based in Europe that sources materials from several countries (India, China, and Turkey) and sells products globally through e-commerce and boutique stores. Understandably, the company’s cash flow is subject to strong seasonal fluctuations. 

Cash flow uncertainty hits hardest when consumer behavior becomes unpredictable. For example, if a sudden economic downturn or global inflation reduces consumer spending, the brand may face sluggish sales during typically high-demand periods, like Black Friday or Christmas. The business's reliance on international suppliers adds another layer of uncertainty: shipping delays or currency fluctuations might force it to hold higher inventory, straining working capital. As a result, the company struggles to predict future cash inflows and plan for supplier payments. 

Currency volatility caused by geopolitical tensions or trade disputes, like tariffs imposed on Chinese fabrics, for example, could drastically increase costs. Moreover, supply chain disruptions (like a factory shutdown in Turkey due to political instability) could lead to order cancellations, further contributing to the unpredictability of cash flow. 

Cost of maintaining liquidity 

In another scenario, a mid-sized pharmaceutical distributor holds substantial amounts of cash of liquid inventory—vaccines, medications, and medical supplies because of uncertain payment schedules from government healthcare programs, which often delay reimbursement for several months. 

Keeping these liquid assets available has high opportunity costs. The company needs to tie up capital in easily accessible cash or near-cash assets even though it could invest that capital in longer-term growth opportunities, like developing new distribution centers. Liquidity costs also include idle cash losing value due to inflation or low interest rates on short-term investments. 

As the company operates across borders, it may need to hold cash in multiple currencies, incurring currency conversion costs and exposure to exchange rate fluctuations. If interest rates rise sharply in key markets, the cost of holding liquidity becomes even higher since short-term borrowing (a potential alternative to holding cash) becomes more expensive.  

Limited access to credit 

A mid-sized tech services company provides cybersecurity solutions to businesses across the U.S., U.K., and several Southeast Asian countries. While it has growing demand from international clients, its creditworthiness is limited by its relatively small size and lack of long-term financial history. 

Limited access to affordable credit becomes a serious liquidity management issue when the company experiences unexpected challenges, like a cyberattack that damages its own infrastructure or rapid client growth that requires scaling its workforce and server capacity. Because it operates in multiple countries, the company has a need for financing in different currencies, which complicates its borrowing options. The inability to secure loans on favorable terms forces it to either delay expansion plans or accept predatory financing options. 

"Effective liquidity management isn’t just about knowing your cash position today—it's about having the right tools and processes to anticipate future cash needs and optimize cash utilization across the business." – Jouni Kirjola, Jouni Kirjola, Head of Solutions & Presales

Liquidity management planning: An example 

A European-based electronics company that designs and manufactures consumer electronics. The headquarters in Central Europe handles all strategic decision-making (finance, design, marketing). The company has shared services centers (SSC) in countries like Poland and India, which manage centralized functions like HR, accounting, and procurement. Manufacturing facilities are in countries like China, Vietnam, and Mexico. The company sells products across Europe, North America, and Asia. 

Global liquidity management planning

Given the company’s complex structure, liquidity management is critical for smooth operations across these diverse locations. Let’s look at how their liquidity management planning works and why it's important in this specific multinational setup. 

Business question answered by liquidity management planning: 

As mentioned, our business has suppliers across the globe and needs to make timely payments to them, as well as its employees in SSCs and manufacturing sites. The key questions to ask are: 

Can the company meet its obligations across multiple countries? 

From a liquidity planning perspective, this concerns the company’s finance team’s ability to monitor cash inflows and outflows across different currencies and regions. For example, while the SSC in Poland handles procurement payments, manufacturing costs in China and Vietnam must be met in local currencies. Uninterrupted production and avoiding client relationships breaking down are critical concerns for liquidity planning to ensure that the company avoids cash shortfalls, even with exchange rate fluctuations and different payment terms, which should lead us to ask: 

Does the company have enough cash reserves to handle global risks? 

With manufacturing sites in politically or economically volatile regions, they must be prepared for disruptions. Relying on their mandate to plan and manage liquidity, the company’s central finance team creates a liquidity buffer to cushion against unexpected shocks. For example, they keep additional cash reserves in both headquarters and regional offices to handle potential factory shutdowns in Vietnam or increased tariffs on exports from Mexico. With this buffer, they ensure that operations continue smoothly and that the company can quickly adjust or finance alternative solutions (like sourcing parts from another region). 

How does the company manage its global cash flow across entities? 

Manufacturing in Asia, service centers in Europe and India, and sales in multiple continents mean cash flows in and out of the company at different times. 

For effective liquidity, the responsible thing for the company to do is to use centralized cash management, pooling cash from different entities, manufacturing units, and sales offices. Consolidating their cash, the company is able to seek higher interest returns, but also cover deficits across the organization. Accurate centralized forecasts make it much easier to see how much cash is needed for each region and allocate it accordingly, which raises a question: 

How does the company handle currency risks associated with international operations? 

As the company deals with multiple currencies (Euros, Dollars, Yuan, Rupees), and fluctuations in exchange rates can affect liquidity, especially when converting revenue from sales in different countries, this is something that the finance team must think about when planning liquidity. Hedging strategies to protect against currency volatility are a natural part of the company’s liquidity planning. The company also forecasts exchange rate movements and adjusts its currency holdings and contracts with suppliers accordingly. Preparing for different scenarios is half the battle, as long as they don’t forget to ask: 

Can the company take advantage of investment opportunities while maintaining liquidity? 

The company may want to expand its manufacturing facility in Mexico or invest in new technology at its SSCs. However, they must ensure they have the cash to do so without affecting their daily operations. By forecasting future cash needs and balancing short-term obligations with long-term investments, the company can decide when it’s safe to make investments without jeopardizing liquidity. This way, liquidity planning helps the business to seize growth opportunities and remain competitive globally while safeguarding its ability to avoid and bridge cash flow gaps, which can prompt the following inquiry: 

How can the company improve its cash conversion cycle? 

Delays in receiving payments from customers (especially in the B2B segment) are often more common than one might like to believe, and they have a great potential to cause cash flow gaps while the company is still required to pay its own suppliers on time. This, too, is part of liquidity management planning: By negotiating better payment terms with both customers and suppliers and optimizing inventory management, the company can reduce the time it takes to turn products into cash. Automating receivables and payables and up-to-date visibility into cash flows support quicker decision-making and adjustments. A faster cash conversion cycle means the company has more available cash for operations, reducing the need for short-term borrowing and improving overall liquidity. Sometimes, though, it is important to recognize:  

Does the company need to raise external financing to maintain liquidity? 

A sudden liquidity crisis can quickly disrupt operations. Let's say if manufacturing costs in Asia rise due to raw material shortages, a stock market crash, or a regional bank failure, it may occur that the company needs additional funding. When push comes to shove, last-minute loans can be painfully expensive. By regularly evaluating liquidity positions, the business can determine if and when it needs to access external financing, like credit lines, and at what cost.  

How to get started with liquidity management planning? 

To help businesses get started with liquidity management planning, we need to outline detailed steps that ensure their cash flow is well-managed across borders and that their operations remain stable despite market fluctuations. But before we get into it, let’s cover our basis and discuss: 

The key components of a liquidity management plan

• Cash flow forecasting: Cash flow forecasting is about estimating future inflows and outflows of cash to ensure that an organization can pay what it must. Cash flow forecasting forms the foundation of liquidity management by providing a clear view of cash availability at any given time or scenario. 
• Contingency planning: Contingency planning prepares the organization for unexpected financial disruptions by identifying alternative liquidity sources and ensures business continuity by safeguarding against liquidity crises. 
• Liquidity buffers: Liquidity buffers are reserves of easily accessible funds (cash, money market accounts, certificates of deposit, stocks and bonds, or highly liquid assets) held to cover unexpected financial needs. Liquidity buffers provide a financial cushion to protect against unanticipated cash shortfalls and solvency in challenging times. 
• Liquidity ratios: Liquidity ratios are financial metrics that measure a company's ability to meet its short-term liabilities using its most liquid assets. Liquidity ratios provide a snapshot of the company’s immediate financial health and its capacity to handle short-term obligations, which affects its ability to borrow on favorable terms. 
• Funding and capital structure: Determining the right mix of debt, equity, and internal funding sources to support business operations and growth. A well-planned capital structure makes sure that the organization has sufficient resources for liquidity needs while optimizing cost and risk. 
• Liquidity management software: Tools and software automate cash flow analysis, monitor liquidity levels, and facilitate real-time decision-making. They enhance the accuracy and efficiency of liquidity management and enable better forecasting, contingency planning, and maintenance of liquidity buffers. 

Step 1: Assess the current liquidity position 

Before creating a liquidity management plan, the company needs to understand its current liquidity situation by examining existing cash, liquid assets, and short-term obligations.

• Analyze the company’s cash position: Gather data on all liquid assets in different accounts globally. It’s critical to factor in different currencies. 
• Assess outstanding obligations: List all payables and liabilities (supplier payments, salaries, loans) along with due dates. 
• Recognize liquidity gaps: Monitor discrepancies between projected cash inflows and outflows and identify patterns of delayed receivables, unexpected expenses, or consistently low cash reserves. 
• Review working capital: Calculate the working capital (current assets minus current liabilities) to understand if the company can cover its short-term debts. 

Step 2: Cash flow forecasting 

A cash flow forecast estimates the company’s future cash inflows and outflows, giving a picture of liquidity needs over time. 

• Consolidate forecasts from different departments and regions: Work with your entities like manufacturing sites, SSCs, and sales teams to estimate revenue inflows, operating expenses, and capital expenditures. The forecast should factor in different currencies and markets. 
• Create short-term, medium-term, and long-term forecasts: Typically, cash flow forecasts are done on a monthly, quarterly, and yearly basis. For example, a company forecasts its cash flows for the next six months. It estimates its expected payments from clients and upcoming expenses like salaries and rent, but SSCs in Poland might need cash for supplier payments at different intervals than the manufacturing units in Vietnam. 
• Factor in variable factors: Include potential fluctuations in sales (seasonality), changes in payment terms from suppliers and customers, and currency exchange rate variations.

"Incorporating seasonality, market conditions, and historical trends into your cash flow forecasting is essential. The more variables you account for, the more accurate and useful your liquidity plan will be." – Karl Henrik Sundberg, Product Manager, Cash Forecasting

Step 3: Evaluate cash flow variability 

Cash flow is rarely constant, especially for multinational companies with operations spread across multiple countries. It's crucial to evaluate where variability might occur. 

• Analyze historical cash flow patterns: Evaluate the seasonality of sales in different regions (for example, peak sales in Europe during the holiday season) and track how costs fluctuate with global supply chains and raw material prices. 
• Monitor payment terms and delays: Some customers in North America might pay faster than those in Asia, while suppliers in Europe may offer longer payment terms. Factor in payment delays and terms negotiation. 
• Consider currency fluctuation risks: Operations in different countries expose businesses to currency risks. Hedging strategies, such as forward contracts or currency swaps, can protect against these fluctuations. 

Step 4: Establish liquidity buffers 

Liquidity buffers are a reserve of cash or cash equivalents that the company can use in emergencies or when cash flow is disrupted. 

• Determine the optimal buffer size: Based on your cash flow forecasts and cash flow variability analysis, decide how much cash should be set aside in liquidity reserves. Typically, this might be a percentage of monthly operating expenses (like 3-6 months of costs, for example). 
• Distribute liquidity reserves geographically: Ensure there are cash reserves in critical regions like Europe, Asia, and North America. For example, reserves in Central Europe might handle corporate obligations, while reserves in Asia ensure manufacturing continuity. 
• Establish lines of credit: Work with banks to set up credit lines or revolving credit facilities for additional liquidity when needed. Use these only when reserve buffers are insufficient. 

Step 5: Implement contingency planning 

Liquidity management should include contingency plans to ensure the company can handle adverse events like revenue downturns, rising costs, or geopolitical instability. 

• Create worst-case scenario forecasts: Develop stress-test scenarios where revenue falls, for example, due to supply chain disruptions or geopolitical events. Evaluate how each region of your operations would be impacted and where liquidity could be stretched. 
• Develop action plans for shortfalls: Establish clear steps for handling liquidity shortages, like drawing from liquidity buffers, cutting non-essential expenses, delaying non-critical projects, or utilizing lines of credit. 
• Monitor external risks: Keep a close eye on global economic indicators (e.g., inflation rates, interest rates) and events that could affect liquidity, such as trade restrictions or exchange rate shifts. 

"A solid liquidity management plan includes regular cash forecasting and stress testing against various scenarios—whether it's market downturns, geopolitical risks, or unexpected disruptions." – Karl-Henrik Sundberg, Product Manager, Cash Forecasting

Step 6: Set up ongoing monitoring and reporting 

Liquidity management is an ongoing process that requires constant monitoring and adjustment. 

• Monitor cash flows daily: Utilize liquidity management software and cash management systems to track inflows and outflows across regions in real-time. Automated dashboards can give instant updates on the liquidity position. 
• Adjust forecasts regularly: Revise cash flow forecasts at least monthly or more frequently during times of uncertainty. 
• Report to management: Regular liquidity reports should be shared with senior management and the board of directors to inform strategic decisions about investments, expansions, or cost-saving measures. 

Liquidity management: controlling what you can 

Proactive liquidity management planning is crucial because of external factors that you or any other company can't control. For example: 

• Interest rate fluctuations or economic downturns can increase borrowing costs or reduce consumer demand and lead to cash flow shortages. No company can control these conditions but must prepare for them by maintaining adequate liquidity buffers. 
• Broader economic shifts, like inflation or a recession, can erode purchasing power and increase costs, making it harder for a company to forecast and manage cash flows. Without proactive planning, businesses may struggle to adapt quickly. 
• Changes in regulations may require companies to alter liquidity management strategies, such as holding more liquid assets or complying with new financial reporting standards. Since companies cannot influence these regulatory shifts, they must anticipate potential changes to remain compliant. 
• International businesses face uncertainties from geopolitical risks, like trade wars or political instability, which can disrupt supply chains or affect currency exchange rates. These risks make it essential to have flexible liquidity plans to mitigate disruptions.

"It's crucial for businesses to move beyond just manual data entry and spreadsheets. Automating cash flow tracking and forecasting is key to keeping pace with the complexities of today’s financial landscape." – Karl-Henrik Sundberg, Product Manager, Cash Forecasting

Solving liquidity management challenges with Nomentia liquidity management tools 

As the complexity the business grows, so does the complexity of liquidity management needs. Adding more regions, currencies, and business units means increasing variables to track. Without an integrated liquidity management plan, things will spiral out of control fast. Without the right tools answering key liquidity questions becomes difficult.

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