There are no two ways about it: cash is important no matter what kind of business you have, and is especially important for banks. It’s particularly crucial in fulfilling your short-term financial obligations. If you can’t, then it can be extremely difficult to attain your long-term goals. This means that more than a positive cash flow, banks need to have high liquidity in order to thrive.
Here are a few tips to help protect your bank’s liquidity base and prevent difficult issues from arising:
Get a Financial Management Software
Think of having a financial risk management software as wearing a health monitor. When you’re able to track and recognize financial risks and changes as they happen, you can better understand their implications to your bank and respond accordingly.
This kind of business software also gives you access to data and computed metrics, so you can monitor various aspects of your organization’s performance. It also helps you construct scenarios so you can stress test your management plans, make adjustments, and guarantee effectiveness. Finally, with granular and accurate data points, you can have both a big-picture and a detail-focused view of your company’s liquidity dynamics.
Analyze Your Cash Flow Cycle
Your cash flow cycle—which is the length of time it takes for a lead to become a client and for that client to send their first payment—should ideally be short. The longer it takes to finish, the less efficient your business is and the more likely you’ll find yourself in a liquidity crisis. Do note that cash flow cycles vary from business to business and client to client, but you should definitely aim to minimize the turn-around times. In the case of a bank, its cash flow cycle starts once a corporate entity or individual opens a line of credit, and closes once an initial amortization payment is made.
If your clients are taking too long to pay, take a look at your business processes. There may be some steps that you could eliminate or fine-tune to make things more streamlined. In particular, evaluate your service delivery. After all, a client won’t pay if you haven’t carried out your promises. You should also consider implementing more cash-forward strategies, such as incentivized payment systems.
Have a Cash Flow Projection Ready
Many business leaders swear by the 13-week cash flow model. It’s used in a variety of situations, such as in strategic planning and crisis management to identify potential liquidity issues. Investors also prefer the 13-week cash flow model, since it gives a detailed but easily digestible view of a company’s financial health.
Having a 13-week insight into your cash flow allows you to make important decisions related to your cash position. For example, you can realign your cash outflow by pausing contracts with nonessential vendors. You can also negotiate with your clients regarding payment terms so you can accelerate or extend, depending on the situation. The key is to make a projection that reflects realistic expectations. You should also be prepared to update your projections when things change.
If you haven’t made a 13-week cash flow model before, don’t worry. It’s easy to make your own using a basic spreadsheet application. You can also find templates online, with varying levels of complexity depending on your needs.
Identify Which Cash Outflows Can Be Halted
In case of a crisis, you need to know which expenses you can halt for the meantime or do away with completely, to preserve the organization’s cash. Look for things you can delay, such as acquiring new equipment. You may also have contracts where you have more flexibility, just in case these are necessary expenses.
You should also identify expenditures that aren’t as vital or that you haven’t committed to yet. Finally, you should consider your investment plans. There may be some items that you can mark for later, but there may also be investments that can be more beneficial when made during a crisis.
After all this, your company may end up not implementing this plan at all. However, knowing that you have a clear course of action when things take a turn for the worse can afford you peace of mind.
Regularly Calculate Your Acid Test Ratio
The acid test ratio compares your liquid assets to your short-term debts, thus giving a measure of your company’s capability to pay these obligations. This liquidity ratio is computed by adding up the company’s accounts receivable, short-term investments, and cash on-hand, and then dividing by current liabilities. Note that other current assets are not included, since they may not be as liquid as those previously mentioned.
When you complete the computation above, you’ll get a number that is either greater or less than 1. A higher number means you have enough assets to fulfill your short-term financial obligations without having to resort to liquidating your other assets.
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Communicate
One of the most important things that help prevent company crises—financial or otherwise—is communication. Leadership should be as transparent as possible to their people, especially regarding current cash measures and how these would change in case of less-than-ideal circumstances.
Should a crisis indeed happen, then communication becomes even more important. Key stakeholders, such as clients and third-party vendors should also be kept apprised of the situation. This helps build trust and ensures business continuity.
The risk of financial troubles like a liquidity crisis is part and parcel of doing business. With these tips, however, you can prepare yourself for this kind of situation, weather the storm, and emerge relatively unscathed.
