In the corporate world, some companies link real estate, inventory items, human resources, machinery and equipment to the value of their assets. Although all of these are an important part of business organizations, a lack of cash can be catastrophic for any business. A reserve is essential to meet sudden needs that arise over time.

But liquidity management is essential to understanding how quickly an investment can be sold without negatively impacting the business. The more liquid an asset is, the easier it is to sell at current market value or fair price, and the faster it can be bought and sold.

Want to better understand liquidity management and why it is essential to a company’s financial success? Keep reading!

What is liquidity management?

Liquidity management is an important accounting measure  that indicates how easily a company can meet its financial obligations. This management measures the payment capacity of a business organization in relation to its debts. Typically, managers express it with figures obtained from current liabilities to avoid crises in the company's finances.

Liquidity management is a separate process that successful companies must deal with on a daily basis. It is one of the most complex procedures that managers face in their daily lives, and it is useful for determining the liquid assets available to pay debts. It can include comparisons of amounts recorded as current liabilities.

Short-term liabilities are generally those that mature within one year. Different ratios can be used to understand cash flow liquidity, including some current financial market indicators. If a company has more liquid assets than short-term liabilities or obligations, it means that it will be able to meet its obligations before they mature.

How does liquidity management work?

Liquidity management is carried out to identify a business's ability to pay off outstanding debts if they become due using its financial assets. This activity, which is the responsibility of managers, helps to understand whether or not the amounts are sufficient to meet short- and medium-term obligations.

What are good practices for liquidity management?

Liquidity management involves executing steps that require different techniques for companies to achieve their goals. The first step is to obtain an overview of past and current assets. Then, it is necessary to develop a plan to achieve the goals. See below some practices of this process!

1. Plan income and expenses

Cash flow , income, and expense data need to be collected in order to create and develop a plan that can cover the coming weeks and months. Recurring outlays can easily be included in financial planning, while estimated amounts are useful for representing other expenses and income.

It is important to record business developments as realistically as possible if you want your estimates to best reflect financial reality. To do this, you will need to reach out to various departments to inquire about future revenues that can be derived from customer and market analysis.

2. Keep an updated cash flow

A manager can get an overview of past cash flows to see what, where, and how the company spends money on a regular basis. Businesses have recurring expenses, such as operating expenses, salary payments, and input purchases. Understand these, control costs  , and gain a deeper understanding of the organization.

The basic prerequisite for reliable liquidity management  is continuous monitoring of cash flow. The more closely the manager can monitor these numbers, the better. Evaluate the inflows and outflows of money in real time, that is, be aware of what revenues and expenses are occurring daily in your company.

3. Have an emergency fund

Liquidity management indicates when the investment will be made, the date the company will receive a loan, and the amount of the installments that must be paid monthly. By recording all of these processes, you will see how much money you have available. Planned investments and an emergency fund should also be included in the planning.

An emergency fund is crucial for weathering cash shortages and achieving business goals during crises. It can come from a variety of sources, including grants, tax refunds, and investments. It can be used to purchase raw materials, pay rent, cover marketing expenses, and more.

4. Review investments

Investment reviews ensure that arrangements and negotiations are made in case outstanding debts need to be settled. With this analysis, a manager plans redemptions to meet leadership strategies . Good fund liquidity risk management practices are applied continuously and avoid unnecessary losses.

Redemption requests can be met according to the rules of each investment and the liquidity characteristics of the securities. A review of the trades made reveals which funds can be withdrawn to create investment strategies, build more appropriate portfolios and meet the schedules established by the leadership of a business.

5. Regularly assess demands

Liquidity demands require an assessment of obligations and guarantees offered. This analysis is not limited to developing a set of scenarios and potential risks of activities. It provides a solid basis for those who use historical flows and past experiences to make better decisions.

Continuous assessment of demand helps to define future holdings in investment portfolios, corporate bonds and to find reliable liquidity estimates. In these circumstances, this is a good practice that companies use to know external and internal information before making trades in the market.

These are 5 tips for monitoring and controlling inflows and outflows in companies  that manage liquidity. It is very important to control accounts payable and receivable to plan the future of the business and pay off your debts as soon as possible. Your analyses will be useful for evaluating the company's performance and profitability.