Right time, right place

Cash & Liquidity Management

Published: Jul 2025

Liquidity is the lifeblood of the organisation – and managing it effectively is key to the treasurer’s role. In this article, we discuss the purpose of liquidity optimisation, the possible obstacles that need to be addressed, and the structures and technology that can help companies make the most of their liquidity.

Managing and optimising company liquidity is an essential part of the treasurer’s role. The Business of Treasury Report 2024, published by the Association of Corporate Treasurers (ACT), found that treasurers expected to spend their time focused on capital and liquidity management in the following 12 months, while 78% said their boards had shown an interest in capital and liquidity in the previous six months.

Royston Da Costa, Assistant Treasurer at Ferguson, points out that liquidity optimisation is a core responsibility of every treasurer. “One of the key outcomes from the pandemic was the focus on cash and cash forecasting that corporates recognised is key for the times we live in,” he notes.

Da Costa adds that liquidity optimisation can help companies realise a number of benefits. These include reducing funding costs, supporting business growth and enhancing investment returns, as well as ensuring resilience and compliance and cushioning the company against supply chain or FX disruptions.

But it’s also an activity that can present some significant challenges. So how can treasurers make the most of their organisations’ liquidity, and which strategies and techniques should they be focusing on in the current environment?

Liquidity optimisation: an overview

“Liquidity optimisation ensures that organisations are able to manage their liquidity position without having excess cash,” explains Mansour Davarian, Head of Transaction Banking Solutions at Lloyds. “It brings together a number of tools at treasurers’ disposal to ensure they have the right amount of cash, at the right time.”

Sander van Tol, a Partner at Zanders, adds that liquidity optimisation involves forecasting cash flow needs, and optimising working capital and asset portfolios to ensure smooth operations from a liquidity point of view and capitalise on growth opportunities – all while considering both the regulatory landscape and associated risk factors.

“The objective of liquidity optimisation is to make the best use of the liquidity within a corporation,” he explains. “So on the one hand, it looks at minimising the amount of cash required to operate the cash conversion cycle of the company, whereby the different liquidity provided to the business on the right bank accounts, in the right currency and at the right time.

“On the other hand, liquidity optimisation looks at optimising the short-term investment of excess cash, whereby cash is centralised, upstreamed and invested in line with security, liquidity and yield (SLY) principles.”

Liquidity management goals

As Hannah Boaden, head of Liquidity, Global Payments Solutions EMEA at Bank of America explains, having an optimised liquidity structure can help companies drive revenue and cost efficiencies.

“One key goal that companies are focused on is to increase visibility of global cash positions,” she says. “The objective to increase visibility goes hand in hand with liquidity optimisation, allowing corporate treasury teams to have better oversight over cash positions globally so that they can be more effectively deployed.”

By optimising their liquidity, companies can make sure they have the cash on hand needed to pay for liabilities as they fall due, and mitigate the risk of having to take on debt or sell assets on unfavourable terms, notes Van Tol. This, in turn, improves financial stability and minimises the risk of insolvency.

“Next to managing the short-term liquidity risk, liquidity optimisation is also essential to increase the shareholder value of a company,” he says. “By minimising the amount of cash required to operate the Cash Conversion Cycle, a corporation can better manage its capital structure, which in turn enhances the shareholder value.”

Obstacles to effective liquidity management

Nevertheless, effective liquidity management can be hindered by a number of different factors, including fragmented processes, numerous bank accounts, and ineffective cash flow forecasting.

“Market uncertainty can make cash forecasting, and therefore liquidity optimisation, challenging,” says Davarian. “This uncertainty may include geopolitical uncertainty and interest rate volatility, where sustained levels of inflation in some countries can result in potential delays in interest rate cuts.”

Boaden highlights the importance of having good cash forecasting practices to aid effective liquidity management. She explains that while centralising liquidity can create great cost efficiencies and provide enhanced visibility, “it’s also important for corporates to be able to forecast where cash positions are needed in local jurisdictions to make payments as and when needed to avoid overdraft positions and additional costs.”

The regulatory environment can also be an obstacle. “Trapped cash, meaning funds that cannot be easily accessed due to local restrictions, can be problematic for corporates who are trying to achieve an efficient liquidity management structure and who want to avoid holding idle balances,” Boaden notes. “Corporates may need to consider alternative solutions to access this liquidity, for example swapping out of local currency into USD and sweeping excess balances into their centralised liquidity structure.”

Alongside regulatory constraints, says Van Tol, cash can also be restricted in situations such as cash positions in joint ventures, or cash provided as collateral for specific projects.

Liquidity management tools and techniques

Common liquidity management techniques include the following:

Physical cash pooling – a structure that involves sweeping balances from more than one bank account into a centralised header account, thereby minimising interest costs and optimising investment opportunities. Types of cash pooling include zero-balance account (ZBA) sweeping, in which all funds are swept from individual accounts, and target balancing, in which sweeping is carried out to maintain a specific account balance.

Notional pooling – a technique that allows balances on a group of accounts to be offset against each other for interest optimisation purposes, without performing physical cash sweeps. Companies can offset debit and credit positions in order to minimise interest costs.

Intercompany netting – a process by which a company’s subsidiaries offset intercompany accounts receivable and accounts payable in order to replace multiple payments with a single payment to or from a netting centre. This simplifies processes and reduces the number of transactions and FX conversions that need to be made.

In-house bank (IHB) – a dedicated internal unit set up to provide services that might otherwise be provided by an external bank, such as cash and liquidity management, financial risk management, and payments and collections on-behalf-of. By implementing an IHB, companies can simplify their account structures and benefit from greater visibility and control over cash.

Cash flow forecasting – a process used to predict cash inflows and outflows over a specific period of time. This typically involves gathering data from multiple stakeholders and systems. Cash flow forecasting is an essential component of effective liquidity planning and informed decision making.

Secrets of successful liquidity optimisation

A number of techniques are available to manage and optimise liquidity, including physical cash sweeping and notional pooling – structures that Boaden says “remain as relevant as ever for our clients,” regardless of the economic environment.

She adds that clients are leveraging this strategy to gain additional oversight over balances and consolidate pockets of liquidity across regions to maximise yield or reduce borrowing costs.

Van Tol says that corporate treasurers are now going beyond prior day cash positions through establishing real-time visibility combined with adequate buffers to manage shortfalls. “There is also a greater focus on ensuring you have an automated enterprise-wide view of all bank accounts,” he says. “Once visibility and access have been fine-tuned, we see a much sharper focus on cash flow forecasting, as this is a cornerstone of liquidity optimisation.”

Davarian, meanwhile, reports “high levels of open account transactions” among some clients. “This may be to implement receivables programmes, so they can access funds earlier, or payables programmes, which companies use to extend their days payables,” he notes. “In other cases, we are seeing more sophisticated financing solutions come to market. The use of Export Credit Agency facilities, for example, is continuing to increase, which enables companies to benefit from cheaper forms of financing against government risk.”

How can technology help?

Technology has an important role to play in helping organisations optimise their liquidity.

Boaden notes that the use of cross-currency sweeping can mean that treasurers no longer need to manage FX conversion manually, which reduces the time spent monitoring positions and making manual payments.

In addition, she says that advances in payments technology are helping to move cash more efficiently and giving treasurers greater real-time access. “This helps with visibility over cash positions and the ability to make improved funding decisions,” she adds.

“Technology is the enabler, with APIs providing real-time access to balance and transaction data, which facilitates faster decision-making and risk management,” says Van Tol. “Predictive and prescriptive analytics is now becoming a reality through leveraging big data, combined with the greater use of structured data available through ISO 20022 financial messaging. This enables informed real-time decisions in addition to proactive planning and contingency measures.”

Making the most of your company’s liquidity

For treasurers seeking to optimise liquidity in the current market, Van Tol advises focusing on harnessing the power of technology to accelerate and elevate real-time balance and transaction information, as well as driving faster and more accurate cash flow forecasting.

“Next to this we would advise corporates to better assess the liquidity effects on their (foreign) investments,” he says. He explains that when companies expand internationally, the business case for the investment tends to be looked at from a management accounting perspective, and that topics such as restricted cash, working capital and the liquidity of investments may not be fully incorporated.

Boaden, meanwhile, advises thinking about the key objectives of the corporate treasury function, as well as broader internal objectives. “Investing the time now to optimise a liquidity solution can harbour significant long-term benefits and help to protect corporates against uncertainties in the macro environment,” she concludes.

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