A company can generate strong cash flow and still lack the flexibility to fund growth or respond quickly when conditions change. Cash may be tied up in working capital, spread across accounts or business units, or reserved for near-term operating needs. A credit facility established several years earlier may also provide less flexibility than the business now requires.
The result is a company that appears financially strong but has less room to act than leadership expects. By the time the finance team sees the full picture, an opportunity may be harder to pursue or financing may need to be arranged under pressure.
“CFOs already understand the importance of liquidity,” said Brett Lane, head of business development for Middle Market Banking at City National Bank. “The value of the right banking relationship is having an ally who understands how the business generates and uses cash and can connect the banking structure to the decisions ahead.”
Seeing the Full Liquidity Position
Consider a manufacturing company experiencing rapid growth. Revenue may be increasing while inventory and receivables grow alongside it.
“Nearly every dollar of cash flow may be committed to working capital,” Lane said. “That can leave very little flexibility to strengthen reserves or fund strategic growth.”
A new investment or acquisition could then require the company to seek financing under pressure. Earlier visibility gives the finance team more time to determine how much cash to retain and how the opportunity should be funded.
Cash flow management tracks money moving through the business. Liquidity management looks more broadly at what is available and what it may need to support.
That view can become harder to maintain as a business expands. Acquisitions may introduce new banking systems, while separate operating units may continue using their own accounts. The finance team may have less visibility into the company’s overall cash position and borrowing capacity.
A banking supporter who understands the company’s operations can help bring those pieces together and provide a clearer view of the full liquidity position. That work starts with understanding what the cash needs to do.
Structuring Cash Around the Decisions Ahead
Effective liquidity planning begins with two questions: What does the cash need to do, and when will it be needed?
Cash supporting payroll, inventory and other operating needs should remain readily accessible. Reserves can provide flexibility when conditions change. Funds intended for a future investment or acquisition may carry a longer time horizon.
“How cash is structured matters as much as the balance,” Lane said. “A strong liquidity strategy gives leadership greater confidence in the company’s ability to act.”
The appropriate structure depends on the company’s operating cycle and its plans. It should reflect how cash moves through the business, including where it is generated and where it is committed.
An experienced banking collaborator can add practical value by understanding those dynamics. That allows the bank to help the finance team evaluate its banking resources as part of one liquidity strategy instead of addressing each need separately.
Keeping the Structure Aligned With the Business
A liquidity structure should evolve as the company changes.
A 13-week rolling cash forecast can help the finance team identify meaningful variances and understand their causes. Connecting the forecast to payroll, taxes, receivables and inventory provides greater visibility into the operating activity behind the numbers.
“A rolling forecast gives the finance team a clearer understanding of what is available, what is already committed and where it has flexibility to act,” Lane said.
Credit capacity should also be revisited as the company grows. A facility designed several years ago may provide less flexibility than the business now requires.
Scenario planning gives leadership an opportunity to evaluate potential needs in advance. The finance team may consider the effect of a delayed customer payment, a supply-chain disruption, a change in rates or a potential acquisition. It can then determine how cash and borrowing capacity would work together.
“Finance teams that regularly consider these scenarios are better positioned to move when conditions change,” Lane said. “They have already discussed the options and understand which resources are available.”
What the Right Bank Can Add
CFOs already balance the immediate needs of the business with their longer-term plans. A strong banking relationship adds capacity to that work.
“The best banking relationships often operate as an extension of the finance team,” Lane said. “The banker understands what leadership is trying to accomplish and brings the right resources forward early.”
That relationship can help the finance team:
- Develop a clearer view of liquidity across the company
- Evaluate funding and cash management options more quickly
- Coordinate the appropriate banking resources around a decision
- Spend less time navigating separate areas of the bank
The result is greater financial flexibility and a more efficient decision-making process. You gain a banking ally who understands the business and helps the finance team prepare for what comes next.
Liquidity is a structure that should keep pace with the business. City National Bank’s Middle Market Banking team works with you and your finance team to understand your financial operations and coordinate the banking resources that support your plans.
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
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