Analysing Liquidity using the Cash Conversion Cycle

For the largest and most complex international corporates, the main problem is how to gain visibility into multiple accounts administered by subsidiaries in different countries using a variety of currencies – and also how to then leverage that visibility to optimise cash and working capital.

As the potential benefits of enhanced liquidity management became clear in the wake of the credit crunch, corporates began to seek more external assistance in managing their liquidity. Some engaged non-bank treasury companies to help them optimise their working capital and manage cash more effectively. However, banks are ideally positioned to meet such a need and many are reaping significant business benefits by offering corporate customers robust solutions in this area.

For banks that seek to help their corporate customers navigate today’s reshaped corporate liquidity management landscape, several questions arise. What solutions should be offered to address corporate customers’ liquidity management needs? How can these solutions be enhanced by simplifying and automating processes? In turn, how can these solutions deliver increased straight-through processing (STP), enhanced visibility, improved performance and more effective capital management?

New technology can enable a corporate to seize the opportunity to improve its liquidity. Indeed, these best practices allow corporate treasuries to apply new techniques to improve their liquidity management:

Focusing on Receivables and Payables to Enhance the Cash Position:

The management of working capital is one of the most important activities of a treasury department, impacting the bottom line of the organisation at large. Lockbox processing, electronic collections, virtual accounts, remote deposit capture and electronic invoicing (e-invoicing) are all activities that can improve operational efficiency, save time, reduce costs, and increase the speed with which a corporate collects receivables, thereby strengthening the bottom line.

Improving Cash Forecasting to Enhance Liquidity Management:

A critical requirement for today’s corporate treasurers is timely, accurate and consolidated information to facilitate cash forecasting. They depend on central access to information in order to quickly and accurately identify whether the inflows and outflows of the funds match, and determine the extent to which the available liquidity will cover the organisation’s operational costs.

Cash flow forecasting capabilities can translate into efficient cash flow generation and management, as these are critical elements for the success of a business. Such capabilities contribute to smoother operations, better investment and the timely execution of financial obligations.

Enabling Visibility along the Entire Supply Chain:

Corporates require visibility into their financial supply chains in order to effectively manage them. When a corporate is connected electronically to its bank and trading partners, it can easily share transaction-related documents and information all the way along the supply chain. This facility addresses several important needs of the treasury department, including financing (as part of supply chain finance) and document presentment (as part of supply chain services).

To enable extending days payable outstanding (DPOs) for buyers and shortening the days sales outstanding (DSOs) for sellers, financing techniques can be used such as factoring, reverse factoring, pre-shipment financing, post-shipment financing and payment guarantee. End-to-end supply chain visibility also enables corporate treasury departments to benefit from optimised cash flow, enhanced liquidity, increased supply chain competitiveness and reduced costs.

Electronic Invoicing – Opportunities for Buyers and Suppliers:

E-invoicing presents distinct opportunities for both buyers and suppliers. From a buyer’s perspective, major advantages include the ability to process large volumes of invoices quickly, and to engage in more efficient data sorting. The automation of the e-invoicing process reduces manual errors and increases STP, which ultimately drives down costs.

From a supplier’s perspective, e-invoicing can enable faster payments, and reduce the number of rejected invoices due to STP. Connectivity from the supplier’s accounts receivable (AR) system to the buyer’s accounts payable (AP) application eliminates the need to manually input data, and reduces processing time and the possibility of error. As the transaction is entirely electronic, reconciliation is better managed, and invoice processing and payment issues are reduced.

E-invoicing helps make the invoice process more efficient. Its adoption streamlines invoice management and enables customers to pay more quickly, reducing the cash conversion cycle duration for a business.


Enhancing the availability of liquidity helps improve the availability of cash across the business. It results in smooth operations and can reduce the need for short-term borrowing. Improved cash availability also reduces a business’ risks.

At its root, the effective and efficient management of liquidity and working capital has become a core necessity for all corporates. Banks need to acknowledge this change – and to make best-practice liquidity management equally core to the solutions they provide to all corporate customers.


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