Liquidity Risk Management Strategies

Written by Trovata Team
February 12, 2021

What is Liquidity Risk Management?

“The primary role of liquidity-risk management is to (1) prospectively assess the need for funds to meet obligations and (2) ensure the availability of cash or collateral to fulfill those needs at the appropriate time by coordinating the various sources of funds available to the institution under normal and stressed conditions.” – The Federal Reserve

How Automating Cash Management Can Help Your Business

Most management teams understand the importance of maintaining healthy liquidity. However, developing control and an accurate understanding of liquidity is a complex, ever-changing challenge, and liquidity management has a real impact, especially in the continuing aftermath of COVID-19. Does your company measure up? How are you handling liquidity risk management?

Understanding Liquidity Risk

What happens when a company faces a liquidity shortfall? A severe liquidity deficiency can cause a myriad of difficulties, from a fundamental inability to expand into new markets to a downward spiral of unpaid debts, denied credit, emergency sales of needed assets, and the worst-case-scenario: insolvency. 

Cash flow is extremely dynamic and is used for wages, vendor payments, and other short-term obligations. If a company finds itself short on the necessary cash to meet these payments, the business’ growth can not only be stalled, but it can fail. Unpaid vendors and employees will turn elsewhere, while banks may call loans or refuse to extend needed credit. The ripple effect, if not contained, could sink the entire organization.

Liquidity Risk Management

The Effect of COVID-19 on Liquidity Risk

In a healthy, relatively stable market, liquidity is more easily monitored and maintained. But in a depressed or volatile market, healthy and sufficient liquidity becomes an absolute imperative for survival. 

As businesses work through the COVID-19 crisis, volatility is looking like the new normal. Across the globe, companies and individuals bounce back and forth between running on all cylinders and just scraping by. With a high level of volatility and no end in sight, it’s more important than ever to manage liquidity risk as effectively and efficiently as possible. Business leaders must find solutions to address and mitigate liquidity shortfalls.

The Challenge of Mitigating Liquidity Risk

The bedrock of risk management is having a clear understanding and ability to manage cash flow down to the dollar. 

A company’s liquidity is typically spread across multiple accounts and assets, meaning various account statements and overviews have to be analyzed to develop a full picture of cash health. This is further complicated by the fact that, for most businesses, multiple agents and departments are responsible for expenditures and inflow. 

Due to the lengthy and manual nature of cash analysis, standard practice is to assume that even the best models and projections will lack precision.  

Advanced API Software Solutions: Easy and Effective

However, new technological advances are allowing businesses to manage cash flow in an increasingly granular yet accessible way. With every account and transaction monitored, all data normalized, and instant up-to-the-minute reports, there’s every reason to take an aggressive approach to monitoring liquidity risk.

To do this, business leaders in today’s economy should build responsive frameworks for liquidity risk management. These frameworks should include:

  • Chains of responsibility. From the CFO to accounts receivable, every person in the company who handles liquidity in any way should be placed into a logical chain of command to facilitate reporting and responsibility.
  • Projected scenarios. It’s clear from the response to COVID-19 that liquidity risk management is an evolving discipline. One of the common mistakes businesses made before the pandemic was a failure to envision the effect of a global catastrophe. Moving forward, liquidity risk management frameworks should make every effort to plan for anything, from operating in a healthy, thriving market to the effect of extreme crises.
  • Plans for cushioning the company from all levels of risk. Maintaining cash reserves will become an essential business practice in the future. However, other methods of protecting against shocks to the system, such as diversifying inflow streams by widening customer bases, will also need to be implemented.
  • Testing. These scenarios and solutions should be subjected to rigorous, regular scrutiny in the same way that any other safety procedures must be tested. Regularly revisiting the framework, and developing the ability to pivot and react to current events quickly, is the only way to ensure that the company is protected adequately from future shocks.

Trovata Can Help You Move Forward

At the forefront of automated cash management, Trovata is helping businesses better understand and analyze their liquidity. By integrating directly with financial institutions’ API infrastructure, Trovata can automate manual cash-related workflows. This not only saves time and resources, but it assures that these crucial reports are accurate and delivered quickly. Trovata’s intuitive and innovative solution makes it possible to:

  • Automate cash forecasting and reporting. Cash forecasting and cash reporting are complex calculations that require considerable time and resources. A nightmare of spreadsheets, phone calls, analysis, and verification can now be streamlined using Trovata’s intelligent API-powered software.
  • Consolidate and normalize your data. Trovata takes all of the crucial components of your company’s cash data and synthesizes them into an accurate, real-time report that’s accessible anytime, anywhere. Want more detail? Trovata allows you to drill down, access granular data, and define your variables.
  • Get started immediately. Trovata is an out-of-the-box solution, with no implementation downtime or IT involvement necessary. Your Accounting department can be up and running with Trovata’s agile, intuitive software powered by proprietary API technology in under an hour. And Trovata builds with your organization, efficiently scaling as your business grows.

In times of financial crisis, leaders need to take the reins confidently. Trovata is here to make that possible, with granular, accurate, real-time data at your fingertips.

Click here to read our case study, “Square Reinvents Treasury Back Office with Bank Data Lake”; learn how Trovata Enterprise Treasury Cloud™ leveraged automation to create a scalable way to process, standardize, and analyze bank data.

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