I used to stay in a hostel when I did my engineering. My home was not very far, (just 220 km) and I used to go home on alternate weekends or once a month. Whenever I went home, my father always gave me money for pocket-expenses. At that point of time, I never understood how my dad ensured this continual flow of cash whenever required. However, once I started earning & looked back, I discovered how difficult it was to ensure constant money flow when it is most required, like over the weekend or in the first week of month. Professionally, when I started working in the Liquidity management domain, I thoroughly understood the nuances of it and started appreciating the liquidity management of my father and its need in the corporate world.
What does Liquidity Management mean in the corporate world?
Basically, liquidity management is an ability of a corporate to fulfill its monetary obligations, short-term or long-term. It helps in maintaining equilibrium between surplus cash balances and the need of adequate short term resources to conduct its daily operations.
Liquidity management ensures funds are available at the right time, at the right place and in right quantity by managing idle funds available in banks across the globe.
Lenders, investors and managers all look at a company’s balance sheet and financial statements to evaluate liquidity risk of a bank or corporates. Banks and/or corporates are often evaluated based on their ability to meet cash obligations without incurring significant losses. At times, it’s not only companies but also countries that are evaluated to meet its cash obligations. Greece is one of the most watched and talked about country in recent times which is being evaluated about its ability to meet its debt obligations.
So, how does liquidity management work? It primarily works on following two concepts:
What is Sweeping?
Sweeping is physical fund transfer between domestic or cross-country accounts. To maximize yield on the corporate customer’s daily cash, sweeping helps to concentrate surplus balances and deficient balances at a pre-defined period into a single concentration account.
What is Pooling?
Pooling involves the theoretical offset of debit and credit balances without any movement of funds between accounts. Pooling is used where account balances must remain separate. It is generally used when balance set-off or interest offset is required. It also reduces the funds transfer costs.
Intellect’s (IDAL) Liquidity management suite is one of the most sophisticated & versatile software to manage corporate’s liquidity management.
We will discuss more on sweeping & pooling logic in some post at a later date.