How to manage a liquidity budget in complex corporations and fast-changing environments

In 2022, Profitbase conducted a survey where 100 CFOs, CEOs, and controllers were asked about their biggest challenges in budgeting and forecasting. The responses revealed that unpredictable external factors were among the top three challenges for almost all respondents.

Ensuring that a company has sufficient liquidity and proper financing is inherently a demanding job in corporations with multiple units and departments. When the liquidity budget and forecasts must also adapt to constantly changing conditions, an already complex task becomes even more labor-intensive.

In this article, we discuss strategies and tools that can help manage the liquidity budget when circumstances suddenly change, making it easier to maintain healthy financial operations.

Why is a Liquidity Budget Important?

There is hardly a greater threat to a company’s existence than running out of money. Liquidity management with a liquidity budget and control over cash flow is often more important than the associated financial results. It’s pointless to have several million in surplus in December if you don’t have the cash to pay your dues in April. Payment problems and lack of liquidity management are among the main reasons why many businesses have to close their doors—despite good forecasts for future results.

Therefore, the liquidity budget is critical for getting an overview of the company’s financial position and identifying any cash flow problems.

This allows the company to prepare for challenges that may arise in the future and take measures to prevent serious problems.

In addition to providing an overview of future cash flows, the liquidity budget can also help the company:

• Identify bottlenecks in cash flow and find ways to improve it
• Anticipate potential problems with paying bills or obligations
• Identify the need for additional financing or investments
• Evaluate the company’s financial performance and efficiency

3 Steps to Maintain Liquidity When Circumstances Change

With a business environment that evolves rapidly, and uncertain times where things can change overnight, liquidity control becomes increasingly important.

As a company that has provided financial planning tools for over 30 years, Profitbase recommends the following to finance departments that find it challenging to manage their liquidity budget:

1. Utilize Digitalization and Automation to Manage the Liquidity Budget

Financial management of large corporations requires robust systems and processes around budgeting, forecasting, and reporting. The systems must handle different levels of detail while providing a comprehensive overview of the entire corporation’s financial situation. It is also important to ensure that reports are available to all relevant key personnel and updated regularly.

In today’s technology-heavy world, there is too much data for the finance department to handle all financial data manually. Therefore, you should supplement spreadsheets with full-scale budgeting and forecasting software that enables quicker adaptation to changes without compromising accuracy and trust in the numbers.

2. Roll Forecasts and Update the Liquidity Budget Regularly

It is important to update the liquidity budget regularly, especially in times of rapidly changing market conditions. This will provide fresher and more accurate insights into the company’s cash position and cash flows, making it easier to identify any challenges or opportunities that need to be addressed.

Read more in the article: TOP 3 Reasons Why Rolling Forecasts Are Better Than Traditional Budgeting

3. Be Vigilant and Proactive with Clear Guidelines on Handling Changes

In a complex corporate structure, there will always be deviations between the budget and actual performance. Therefore, it is crucial to be aware of these deviations and take swift actions to minimize their impact on the liquidity budget.

This may involve adjusting budgeted amounts, identifying and addressing issues in financial management, increasing credit lines, or renegotiating agreements with suppliers and customers.

To manage changes in the liquidity budget effectively, it is important to have clear guidelines on how changes are handled. This includes how changes are reported, who has the authority to approve changes, and how changes affect other parts of the budget. It is also important to have a clear communication strategy to ensure that all relevant stakeholders are informed about the changes and their impact.

Conclusion

Whether sailing smoothly or navigating rough seas, the CFO must ensure that the company always has sufficient liquidity and proper financing. Here, the liquidity budget is crucial for keeping decision-makers updated on how to manage the company’s finances responsibly and effectively.

To manage liquidity in large corporations when things are constantly changing, it is important to work on improving the software and tools used, the working methodology, and the organizational processes for responding to changes. With the right tools, approach, and mindset, the company is well-equipped for unpredictable events and can adapt faster without sacrificing the accuracy of the numbers.

It is also important to simulate best, worst, and most likely scenarios of how different choices will affect the liquidity budget and cash flow 3, 6, and 12 months into the future. This provides an overview and helps see the big picture, ensuring responsible liquidity management during periods of significant market uncertainty.