Liquidity planning takes cash forecasting to the next level by harnessing new technologies, APIs, AI and data analytics.

APIs allow data to be collated from multiple sources, both internal and external, eliminating much of the manual process traditionally associated with forecasting. AI can be used to identify patterns in payments to better forecast future cash flows. And data analytics is developing over time, such that it is possible to not only forecast the most likely future cash position but also model alternative scenarios too. The result is better decision-making across the organization.

With access to much more granular data across their organizations, treasurers can model the impact of changes on the company’s future cash position at both a micro and macro level. Instead of the old model that used static data to forecast positions, liquidity planning incorporates dynamic data that recognizes that a change in one variable has implications for others.

In terms of outcomes, a cash forecast provides a series of future cash positions that need to be managed. In contrast, a liquidity plan provides an opportunity for a company to take a more active approach to cash and liquidity management. The liquidity planning model is built in a similar way to the forecast, so different cash flows (e.g., AR, loan repayments and tax) form part of the model. The key difference is that the model is more dynamic and can be interrogated in real-time.

So, while the liquidity planning model will provide a series of future forecast cash positions, it will also allow users, including the CFO and the treasurer, to model a range of different scenarios. For example, the CFO may want to know the impact of a change in an exchange rate, or interest rate, on future liquidity, or to see what might happen if sales fall 10% over the next quarter. In each case, the model will provide an indication of how the forecast cash positions might change. In turn, the various outcomes can both inform the wider business strategy and also indicate how exposed the company is to a wide range of factors from market rates to a dip in customer sales.

Liquidity planning is of particular value to treasurers who may have the opportunity to access pockets of liquidity — for example, to tap an unused or underused credit line (a committed line of credit, a revolver or a term loan) or issue debt. Drawing down this liquidity will give the company access to cash. There are liquidity consequences and other consequences of doing so, as there could, for example, be an impact on the credit rating if cash balances hit a certain threshold or if loan covenants are triggered. Liquidity planning can help treasurers to model these potential consequences, which include the impact on both the balance sheet and the bottom line, when managing liquidity levels.

In essence, while cash forecasts provide insight for treasurers seeking to manage cash at particular points in time, liquidity planning models provide insight for CFOs and treasurers seeking to influence liquidity levels over a period of time.

Want to learn more? Read the 2023 AFP Executive Guide: Rethinking Liquidity Planning to Manage the Cash Lifecycle, underwritten by Kyriba.