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Global liquidity challenges
When it comes to the work of a corporate treasurer, questions about current cash position, cash forecast accuracy, working capital, funding options, and risk exposures are frequent. Why?
You only have to glimpse the news to see how global market disruptions (think inflation, supply chain breakdowns, interest rate fluctuations, and regulatory changes) have significantly increased the pressure to enhance liquidity control and cash management. Many businesses are feeling the squeeze, and those who are not are increasingly looking for ways to keep the proverbial wolves away from the door. The global business environment is irreversibly interconnected, and without ways to meet their short-term liabilities, there's no point in dreaming about growth.
While many nations have moved on from monarchy, cash is still king in business. Let's discuss why cash control and liquidity management are essential for business resilience:
Cash control and liquidity management for modern enterprise
If we ask how the global economic environment has increased the importance of liquidity management, the answer is simple:
The ongoing conflicts in the Middle East, particularly the recent escalation in tensions between Israel and Hamas, have led to increased oil prices due to fears of supply disruptions. The resulting volatility in global markets has driven investors to seek safer assets. The technological decoupling between the US and China has led to increased uncertainty in global markets. Cross-border investments have been reduced, and funding costs for banks have increased. Central banks, like the Federal Reserve and The European Central Bank, have been increasing interest rates to combat inflation, which has led to reduced market liquidity and higher borrowing costs.
As an example, we can look at a multinational SME with operations offshored to different regions—what challenges do they face?
Our European-based multinational SME has been navigating a volatile global environment marked by geopolitical tensions, inflationary pressures, and supply chain challenges. Rising interest rates, market fluctuations, and demand variability are impacting its financial stability.
The company sources raw materials from various Asian suppliers. Recent geopolitical tensions in the region, trade disputes, and restrictive tariffs have caused delays and increased import costs. Also, a global shortage of semiconductors has disrupted production schedules, leading to missed orders. Delays in raw material deliveries have extended production cycles, reducing cash inflows from sales. The company’s cash conversion cycle has lengthened and forced it to rely on credit lines and short-term loans to cover operational expenses.
Due to fluctuations in global demand, particularly in North America, where a key client has reduced orders, the company is experiencing reduced revenues. The euro’s recent depreciation has made European exports more competitive, but it has not fully offset the reduced demand. The drop in orders from the US market has reduced cash inflows, while the company still faces fixed costs, like wages, utilities, and debt repayments. All this has led to a significant reduction in its available working capital.
The global rise in inflation has increased the cost of raw materials, transportation, and labor, squeezing profit margins. Additionally, central banks in both Europe and North America have raised interest rates to combat inflation, raising borrowing costs. Rising interest rates have made existing loans more expensive to service, while new credit lines have become less attractive due to higher costs. This has reduced the company's cash availability, as more of its income is diverted towards interest payments.
Increased inflation has also led to a rise in input prices, which the company has struggled to pass on to its customers due to the competitive market environment. Simultaneously, demand in Europe has become unpredictable, with consumers cutting back on non-essential goods. Higher costs combined with fluctuating demand have compressed margins, reducing profitability. Cash reserves are being used to cover the growing gap between revenue and operating costs, causing liquidity to dwindle.
With all this going on at once, it's no wonder controlling cash has become a strategic priority.
Managing liquidity across multiple regions with varying operational requirements and market conditions presents significant complexity. It’s often the case that each region faces different economic conditions that affect cash flow differently. The need to balance cash reserves in stronger regions while supporting operations in underperforming markets can strain the company’s overall liquidity. Effective liquidity management grows in importance to ensure the company has sufficient working capital to meet day-to-day expenses, maintain productivity efficiency, and avoid disruptions. Optimizing liquidity is the key to swiftly responding to market shocks, disrupted supply chains, and interest changes, but in reality, ensuring greater financial resilience and agility is more complicated than it might seem on paper.
Core issues of enterprise liquidity management
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On top of the list of key challenges that multinational organizations face in liquidity management is visibility into global operations, cash, and financial risk exposures. Why? Disparate financial systems, varying regulatory environments, and fluctuating market conditions across regions make it difficult to consolidate and analyze financial data, which hinders effective cash flow forecasting and risk mitigation.
The second-ranked challenge, digital infrastructure gaps and reliance on manual processes is similarly simple to explain. It hampers liquidity management by creating inefficiencies in tracking cash positions, delays decision-making, and increases the likelihood of errors, which complicates coordination across regions.
The third list-topping challenge, FX volatility and the impact of market instability on liquidity ranks highly because fluctuating exchange rates can erode profit margins, distort cash flow forecasts, and introduce significant financial risk, particularly for organizations operating in multiple currencies and relying on cross-border transactions.
If we relate this to our previous example, we can see how poor cash visibility due to inadequate liquidity management software complicates their daily operations. Without accurate data on cash balances across their regions, the company struggles to allocate funds efficiently. This will lead to delayed payments to suppliers and missed opportunities for favorable FX hedging. Inaccurate cash forecasting also forces the company to hold excessive cash reserves as a safety net, which reduces available capital for growth initiatives. Their manual processes and siloed financial data increase errors, further impairing liquidity management.
Why is improving liquidity management a top treasury priority?
Deloitte's 2024 Global Corporate Treasury Survey, the European Association of Corporate Treasurers (EACT) 2023 survey, and PWC's 2023 Global Treasury Survey all present the increasing complexity of global operations as a major challenge to managing liquidity.
For our multinational SME, stronger liquidity management could prevent cash shortfalls by implementing real-time cash visibility tools that provide accurate forecasts across all regions, enabling proactive decision-making. By leveraging automated processes, the treasury team could better track cash flows, optimize working capital, and identify potential funding gaps early. Improved cash management strategies, like effective currency hedging and timely cash allocation, could enhance operational efficiency and mitigate market volatility risks. Accurate cash flow forecasting, which is another often quoted challenge for treasurers, also has a significant impact on managing liquidity. Accurate cash forecasting allows businesses to anticipate cash needs and ensure that they maintain optimal liquidity levels for operational expenses while identifying opportunities for strategic investments or debt management. With up-to-date forecasts, the company can make informed decisions regarding capital structure, cash flow allocation, and investments.
Technology: Solutions to liquidity management challenges
The challenges of liquidity management raise a host of concrete questions, like “How can organizations enhance cash visibility across domestic and international operations?" "How can centralized payment automation improve the management of cash flows?” and “How can accurate visibility of cash inflows and outflows improve cash forecasting reliability?”
Modern liquidity management software addresses cash visibility challenges by enhancing global bank connectivity, which improves visibility across both domestic and overseas operations and makes cash positions comparable and transparent. Increasing automation in payments simplifies both regional and global transactions, making handling of complex international payables and collections efficient. Centralized payment systems, as part of liquidity management software, make sure that sufficient funds are available when they are needed. Moreover, automation, combined with accurate visibility of the timing of cash outflows and inflows, bolsters the reliability of cash forecasts.
Liquidity management software also mitigates financial risks through features like scenario analysis, stress testing, and FX risk management that allow businesses to evaluate potential financial impacts and prepare for adverse market conditions.
Treasury technology gaps: Addressing implementation barriers and considerations
As identified by the 2024 Global Treasury Survey, global organizations face several key gaps when adopting liquidity management technology. Resource constraints often hinder the implementation of advanced systems, while manual processes remain prevalent, causing inefficiency in cash management. Additionally, the reported knowledge gaps can impede the effective use of the technology and create challenges in applying the right solutions, selecting appropriate providers, and managing cost constraints associated with new systems.
Overcoming liquidity management software implementation barriers
Companies looking to overcome liquidity management-related resource constraints can optimize their limited resources for efficient liquidity management by prioritizing essential features that address their specific cash management needs. They can start with a phased implementation, focusing on critical functionalities like cash forecasting and payment automation, and gradually integrate more complex features as resources allow. Opting for cloud-based liquidity management solutions can reduce upfront costs and maintenance burdens while providing scalability.
Benefits of liquidity management software: Key features and advantages
- Risk mitigation: Advanced liquidity management software significantly reduces manual errors and enhances security and controls, allowing organizations to proactively identify and mitigate risks. The ability to leverage cash forecasts helps companies anticipate potential liquidity risks like cash shortfalls and enables businesses to build liquidity buffers while minimizing idle cash and developing smart hedging strategies. Advanced risk management tools allow businesses to navigate market instability, interest rate fluctuations, and foreign exchange (FX) volatility effectively. With integrated liquidity management solutions, treasury teams can proactively identify potential risks and implement strategies to mitigate their impact on cash flow and overall financial health.
- Automation of treasury processes: By automating manual treasury processes, businesses can free up valuable resources. This allows treasury and finance teams to focus on more strategic tasks. Process automation not only enhances productivity but also streamlines cash management activities by reducing the time spent on routine transactions. Liquidity management software allows treasury teams to become value-add partners to CFOs and offer critical insights that inform strategic decision-making. As a result, treasury teams help to optimize capital allocation and contribute to the organization’s long-term financial stability.
- Increased cash visibility and reporting: Enhanced visibility into cash positions and advanced reporting capabilities provide up-to-date insights for informed decision-making. Global cash position transparency allows organizations to monitor their liquidity status and facilitate better financial planning and management of cash resources to support ongoing operations and future growth.
- Integrated cash flow forecasting improves financial decision-making by providing accurate data and centralized control over cash activities, allowing organizations to gain a comprehensive view of their cash position. Forecast accuracy enables better assessments of cash inflows and outflows and leads to efficient working capital management and more informed strategies for optimizing the capital structure. With up-to-date insights into liquidity needs, businesses can make timely decisions regarding investments, financing, and resource allocation.
Making the case: Investing in liquidity management solutions
Returning to our example organization from before we can look at the rationale behind investing in liquidity management software:
The company was facing significant FX volatility and liquidity constraints due to its operations across Europe, Asia, and North America. To address these challenges, the company implements a cutting-edge liquidity management system that provides consolidated cash flow forecasting and tools for FX risk management. With improved visibility into cash positions, the company’s treasury team can better anticipate cash needs, optimize capital allocation, and implement smart hedging strategies to mitigate currency risks. As a result, the company not only stabilizes its cash flow but also positions itself to capitalize on growth opportunities in emerging markets.
Why is investment in liquidity management technology crucial?
Investment in liquidity management technology is crucial for businesses aiming for resilience and growth because it equips treasury teams with the tools needed to navigate uncertainties in global markets. By addressing key challenges like the accuracy of cash flow forecasting and global cash visibility and control, these solutions align with treasury priorities and enhance the overall efficiency of cash management processes. As the company’s CFO frequently asks critical questions, like, "How can we ensure that we have enough liquidity to cover operational expenses?" and "What strategies can we implement to mitigate the risks associated with currency fluctuations?" The company’s liquidity management system provides the insights and data necessary to answer these questions confidently.
Positioning for long-term success
Improved liquidity management puts the company on a path toward long-term success by enabling better capital allocation and enhancing governance through greater transparency and control over cash activities. With efficient liquidity management practices supported by liquidity management software, organizations can maintain financial stability and make sure they are well-prepared to respond to market fluctuations and capitalize on investment opportunities. Effective liquidity control is paramount for growth and business resilience, particularly in uncertain global markets. Investing in advanced liquidity management solutions means investing in financial stability, effective risk management, and sustainable success in an increasingly complex business environment.
Building financial resilience for multinational operations
Controlling cash and effective liquidity management are central to business growth and resilience because they provide the foundation for navigating an increasingly volatile global market. Market disruptions, supply chain challenges, and financial instability can severely impact a company's ability to meet its obligations as organizations without evolving liquidity controls risk falling behind in a landscape where agility and responsiveness are crucial for survival. Demands of the global markets drive treasurers to prioritize cash flow visibility and risk management. Modern liquidity management software plays a vital role in this process by offering centralized control over cash activities and enabling accurate forecasting. By automating manual processes and improving data visibility, liquidity management solutions empower treasury teams to make informed decisions, mitigate risks, and ultimately ensure that their businesses are not only resilient in the face of challenges but also positioned for sustainable growth. In today’s interconnected world, effective liquidity management is not just a necessity—it is a strategic imperative.
How to win liquidity challenges: A summary
For any company, liquidity is survival. Learning why investment in liquidity management technology is essential and how it directly impacts growth and stability is a critical business undertaking. The ability to answer questions like what the core cash control issues treasury teams face are, and how technology can solve them can guide companies through rough situations. Focusing on overcoming the barriers of software implementation, this article shares how companies can improve cash flow efficiency and visibility across global operations. The right technology doesn’t just manage cash—it builds resilience. For any business aiming to stay agile and financially secure, these strategies aren’t just helpful; they are necessary.
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