Liquidity Management: 3 Strategies

Written by Trovata Team
August 24, 2021

It’s necessary to utilize your organization’s liquid assets to achieve strategic objectives and provide value for their bottom line, but these assets present some inherent risks. If you can manage liquidity effectively then you can build a strong foundation for competitive growth..

Much of the challenge in accomplishing this is achieving cash visibility, across a variety of accounts and currencies, so you can have a complete picture of your company’s financial health. You need this real-time view of your company’s financial health in order to better adjust your strategy based on potential external factors like:

  • Interest Rates and Fluctuations in the market

  • Fiscal Policy both Domestically and Abroad (If you operate globally)

  • Foreign Exchange Rates (Often referred to as FX Risk)


Developing a strategy appropriate for your organization

Every business and organization is different. What works for the leader in an industry may not be appropriate for a startup. As you consider the liquidity management strategies below, spend some time thinking about these important factors as they relate to your business:

Culture: Is your organization distributed, with treasury control granted to local or regional offices? Or is it centralized, with a single office handling treasury services for the entire organization? As you select or develop your own strategy, consider how your organization will respond as they adopt and implement it.

Infrastructure: Does your organization have the necessary cash management tools to provide the level of visibility required to implement the strategy? Also, does your organization have enough complexity in how it relates to financial institutions to justify a particular strategy or approach? If you’re small enough to operate out of a single bank account then there’s no need to adopt strategies designed for global organization with balances in several currencies with a few virtual accounts thrown in for good measure, but it’s a good idea to keep them in mind as your business grows.

Policy: Some countries have very specific tax and business rules for how banking is handled. Be certain that the strategy you settle on is within bounds of the policies of the regions where you operate.


Three common liquidity management strategies

Depending on the needs and goals of your organization,Our partner JP Morgan has outlined three different strategies for liquidity management:

  • Physical Concentration is placing all of your organization’s balances into a single account.

  • Notional Pooling is maintaining multiple accounts in one bank, but the bank combines these accounts when calculating interest.

  • Overlay Structures are multiple accounts with a periodic sweeping process performed by the bank, typically at end-of-day.


Strategy 1: Physical Concentration

One simple way to control the flow of liquid assets is to consolidate them into one central account or location. By physically consolidating liquid assets, you gain a clear line of sight over their assets and, in turn, are more easily able to manage them.

The clear benefit to this strategy is that it is the simplest way to gain visibility of and manage liquid assets. Additionally, it simplifies risk management as only one account is required.

In terms of implementation, this strategy will be easier for organizations which have a smaller number of accounts to consolidate than it will be for an organization with many banks and accounts. Additionally, if an organization needs to operate in more than one currency, then it will be exceptionally difficult to deploy a strategy based on physical concentration.

Even if you have global accounts in multiple currencies, Trovata makes it easier than ever to achieve cash visibility. Our Direct-To-Bank APIs consolidate and normalize all your bank accounts, regardless of currency, into a single platform, empowering you to better monitor, analyze and forecast your cash. Given the unique needs of each company, it can be useful to speak with one of our experts about how automated cash management platforms make it simple for you to gain a clear picture of your cash position.


Strategy 2: Notional Pooling

As opposed to physical concentration, notional pooling leaves balances in their respective accounts. In notional pooling, banks “combine” the balances and convert them to one currency to calculate interest.

This presents a potential solution for organizations who might have too many different accounts and currencies to implement a physical concentration strategy. By leveraging notional pooling, larger organizations can mitigate FX conversion costs without expending the effort of consolidating accounts and corporate relationships.

An important consideration, however, is that not all countries permit notional pooling, and these tactics will typically attract attention from auditors and tax agencies. For organizations addressing global markets, a notional pooling approach will need some further examination to ensure regulatory compliance.

Trovata enables you to better monitor your cash flows across all your accounts. Our comprehensive suite of automated cash reporting and forecasting amplifies your ability to report on your cash flows from all accounts in one real-time dashboard. Not only do these automation capabilities save you significant time and resources utilized through manual processes, but it also enables you to make faster, data-driven decisions from real-time cash position data.


Strategy 3: Overlay Structures

Overlay structures allow your business to make use of both physical concentration and notional pooling approaches. In a liquidity management strategy centered on overlay structures, balance collection is automated with an overlay bank and sweeps. This helps mitigate some of the risks associated with notional pooling and also empowers more distributed organizations to keep their funds distributed.

Duplicate data is a key challenge to an overlay structures strategy due to necessary use of sweeps to consolidate cash data. The delay in sweeps and cut-off times can lead to you having incomplete cash data, potentially leaving your treasury with a major cash visibility gap.

Trovata minimizes the risk of duplicate data by establishing a financial big data pipeline directly to banking partners. This eliminates the need for an overlay bank and waiting for end-of-day sweeps to post as Trovata provides up-to-the-hour cash balances and position across your accounts.


Conclusion

Finding the right liquidity management strategy for your organization can be challenging, but finding the right tools to execute your strategy doesn’t have to be. Trovata can help you by automating manual workloads, connecting directly with banks, as well as giving you a clear line of sight over your cash at all times.

Don’t go it alone, talk to one of our experts to access the cash visibility you need to successfully execute your liquidity management strategy.

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