Manage cash flow

What is operational liquidity?

Operational liquidity is foundational to your business because it’s the ability to access enough cash to cover daily expenses and other short-term obligations, such as payroll. It’s the cash category where having a disciplined process to move receivables in quickly, manage expenses on payables, and root out idle assets or resources keeps as much capital in play as possible.

Profitability can suffer when a company lacks visibility into this part of its liquidity picture or when inefficient manual processes open the door to slow receivables or unwanted fees on payables.

Paape explains that part of Truist’s collaboration with clients is to analyze a business’s receivables and payables, and layer in solution expertise and industry best practices.

“We ask what we can help with from an efficiency standpoint,” Paape explains. “If a client has a static level of operational cash, we can set up an account structure that will help them move money between their accounts, between their legal entities, to properly fund their companies. And we can share insights into how similar clients in the same industry operate with these sorts of account structures.”

Truist can also help improve cash velocity and forecasting accuracy through:

• Real-time payment and real-time settlement tools
• Integrated and automated receivables and payables systems
• Zero balance account structures to perform automated functions like sweeping cash from subsidiary accounts into a master account
• Cash positioning and forecasting strategies

Reserve liquidity is your financial defense because it’s the cash your business uses to cover short-term, unexpected, but necessary expenses. Reserve liquidity might be used if material or shipping costs go up, or sales dip below your forecast. It helps your business stay resilient in downturns but doesn’t drive growth.

Yet keeping too much cash in this category (“over-reserving”) can tie up capital unnecessarily. “Excess liquidity isn’t extra,” says Davis. “It’s deferred decision-making.”

Davis and Paape recommend asking yourself simple but intentional questions when excess liquidity is being held:

• What risks is this cash protecting us against?
• What opportunities could this cash enable?
• What return or flexible trade-off are we accepting?

“I often see over-reserving when operational management is smooth and the business is doing well. They generate excess cash that isn’t needed from a day-to-day perspective, and it’s sent off to the sidelines,” Davis says. “But is it really providing a buffer? It’s not if leaders are letting it sit instead of making decisions about where those dollars fit strategically and where those dollars can be maximized.”

The first step in creating a reserve liquidity plan may be a liquidity stress test. In the test, you estimate different scenarios where you’d need reserves, and how much. For example, if both shipping and labor costs went up by 5%, how much of your reserve would you need? A liquidity stress test helps you find the right allocation of funds for current and near-term conditions.

Once you have that visibility, you’ll have better data for your reserve liquidity plan. A hybrid deposit account structure is one tactic to consider; in this structure, funds are highly accessible but also have the opportunity to earn interest. Hybrid accounts help create value but don’t incur penalties when you need to access the assets.

Companies should also consider how borrowing complements reserve liquidity. After all, if your company has the revenue and standing to qualify with a lender, borrowing can be a lever for growth and a path to optionality. “Ensuring you have the appropriate credit facility in place is also an important piece of a liquidity strategy,” Davis says. “Having a holistic conversation is important.”

Paape agrees and sees that clients benefit from integrating not just credit, but all financial facets of their business into how they work with Truist. “It’s that broader picture,” he says. “We want them to feel, ‘My bank is making my life so easy from a day-to-day perspective.’”

Strategic liquidity is cash set aside to fund growth, acquisitions, and innovation, and can create optionality. It’s the means for your company to go on offense.

Paape explains that supporting clients’ strategic liquidity needs occurs through an ongoing dialogue. “Staying current with what the client is focused on short-term and long-term means we’re able to match up the solutions that we have to help them succeed financially.”

Paape gives the example of a company with an initiative they’re planning to kick off in 10 months—even though they have the dollars today. The company and its bank team could compare the risks and rewards of holding the cash safely versus investing it across those 10 months.

Of course, interest rates would also play into such a decision. In higher-interest-rate environments, letting the cash for that initiative sit idle is more expensive. In lower-interest-rate environments, holding the initiative’s cash (and even a little extra) may make sense. “Interest rates change the cost of flexibility,” Davis says.

Strategic liquidity is usually supported with a combination of investing, borrowing, and expense management arranged for your company to help deliver its optimal strategic liquidity position. Like your reserve liquidity, strategic liquidity can be categorized into different goals, such as expansion or innovation. Categorization can help provide better planning and visibility into how well the company is progressing toward its future goals. 

Every company has liquidity puzzles to solve. Davis and Paape note that middle-market companies manage liquidity with less margin for error than large companies do. They’re likely to have a less diversified range of suppliers, customers, and markets, and potentially fewer funding options for the business.

“That’s where a bank partnership can really bring insight and flexibility,” Davis says. “We make sure to bring liquidity solutions that are simple, scalable, and predictable. Middle-market companies tend to have lean internal finance and treasury teams, so that complexity can upset the balance between control and agility.”

Those companies and larger ones, as well, appreciate having solutions that free up time. Integrated and automated payment tools do this while also facilitating visibility, reducing fraud vulnerability, and actively supporting the company’s strategy. Davis and Paape keep an eye on finance technology and upcoming advancements on behalf of clients, such as resources coming in the next 12 to 24 months that companies’ treasury and finance teams may find beneficial.

If that sounds like more than just basic banking, that’s intentional. The best commercial banking partners are an extension of the clients’ business, Davis says. “When clients have the confidence and comfort to really put all the cards on the table in terms of what their financial needs are,” he notes, “they’re leveraging the advisory approach to the most of their ability and taking advantage of a really big opportunity.”