Cash & Liquidity Management

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Focus on Liquidity to Win Gold What keeps every athlete in his game is fitness and health. Without these, success is impossible. The way to keep your company fit and ensure its financial health is liquidity. Not solvency, liquidity. Ultimately, although a much-quoted phrase, cash is king. ARTICLE PDF NO LONGER AVAILABLE.

Focus on Liquidity to Win Gold

by Maarten Mol, Chief Executive Officer, Fortis Transaction Banking, Fortis Bank

The Olympics this year was an event marked by unprecedented achievement, records broken and medals won. On a personal level too, it has been an important summer for me as I moved from ABN AMRO to head up the new Fortis Transaction Banking division, a step which I have taken with a great deal of enthusiasm, but also humility, bearing in mind the high expectations of our clients, employees and other stakeholders.

But across the summer, while the back pages of the newspapers told of defying the odds and absolute focus, the front pages were filled with negativity and gloom. Undoubtedly we are all experiencing difficult times, but as every athlete will tell you, behind every success has been hardship and personal challenge. During vulnerable economic periods, there will be winners and losers. The winners are those who can take courage during uncertain times and turn adversity to advantage.

Taking courage

What keeps every athlete in his game is fitness and health. Without these, success is impossible. The way to keep your company fit and ensure its financial health is liquidity. Not solvency, liquidity. Ultimately, although a much-quoted phrase, cash is king. All companies need to consider how to manage what they have, and like the best athletes, push the boundaries of what can be achieved. Companies should not be pulling back and ‘playing safe’, as your competitors will certainly overtake you. Rather, you should be contemplating your financial resources and considering how to scale the company, reviewing the competition to identify opportunities and positioning the company for further growth.

Liquidity should be considered on three levels: cash management - looking after what you have; working capital management - balancing the internal drivers of cash inflow and outflow which in turn leads to supply chain management. Supply chain management will be the topic of many discussions during the conferences over the next few weeks, and it is often tempting to complicate what is essentially common sense. Companies invest a great deal in the processes, technology and people involved the physical supply chain to avoid wastage and ensure that supply is proportionate to demand. But are you applying the same discipline to managing your cash? My experience is that most companies are not. Without focus, cash simply becomes a stockpile, doing little to support the company’s objectives. The larger and more international the company, the harder it becomes to manage your cash, but the theory is simple. How much cash do you actually need? Divide your total cash flow across the 250 business days in a year. If your company has a turnover of €250m, one day’s worth of cash flow is €1m. It should be possible to push your average balance to within €1m. If it is never bigger than that, you could have significant amounts of cash freed up for other purposes. The number of companies that achieve this is surprisingly small. While it is harder for some companies than others to reduce their cash balances and working capital requirements, it just takes focus.

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