Liquidity and cash flow go hand-in-hand. After all, positive cash flow can ensure more liquidity. But of course, there is far more to managing these two important financial components. This is where Research Optimus (ROP) pitches in to provide liquidity risk analysis that helps with the evaluation of cash flow management and detailed report around it.
Market volatility can impact a company’s ability to raise funds or issue bonds. If the company hasn’t planned for such illiquid periods, it can find itself heading for insolvency. ROP’s team of analysists assist in analyzing the liquidity, which would eventually guide in managing cash flow, so the company remains financially stable through good times and bad.
Cash Flow Management
Cash flow management involves overseeing the incoming and outgoing of money. That is revenue and expenses. More revenue than expenses can lead to positive cash flow in which the company has an excess of cash. More expenses or COGS than revenue means the company is burning its cash to fund operations.
It’s the latter scenario that makes cash flow management important. Purchasing of supplies or inventory can cause cash flow shortages. For example, when customer invoices are net 60 and suppliers must be paid on net 45, there is a 15-day gap that the company must fund. Unless there are other sources of positive cash flow, the company will continually experience negative cash flow scenarios, causing it to use cash reserves. This is an example if inadequate cash flow management.
As a financial research service provider, ROP suggests adjusting the credit policy and requesting better supplier terms so that the company might start doing net 45 on customer invoices and request suppliers to maintain a net 60 payment cycle. The 15-day gap is now in favor of the company since it can fund supplies/inventory with customer funds.
How does liquidity tie into cash flow management?
Liquidity Risk Analysis by Research Optimus
Our liquidity risk analysis service helps to determine the number of reserves (liquidity) needed during volatile and optimal operating periods. Volatility can be systemic - affecting companies across many sectors. It can be more sector-driven or even isolated to one company. Many events can lead to market volatility such as a large jump in inflation, surprise trade tariff announcements, or the large failure of a financial institution.
Companies don’t know when volatility will strike, but they should be prepared for it. Part of this preparation involves having enough reserves to ride out volatile periods when capital markets dry up. During such periods, it can be difficult for companies to raise funds. But with enough reserves on hand, companies won’t have to worry about raising funds in capital markets.
Knowing how much in reserves are needed during volatile periods is found through stress testing. By testing various negative scenarios, ROP’s experienced team of financial analysts develop models to suggest the number of reserves needed for each scenario.
Once liquidity has been analyzed, the next step is the management of cash flows to ensure liquidity levels are maintained.
Managing the Dependency Between Liquidity and Cash Flow
The projections as the result of ROP’s comprehensive cash flow analysis services allow the planning and execution of capital projects. Based on historical trends, a business can have confidence that its projections are fairly accurate. These projections will also need to take into account any negative market events.
If markets begin turning negative, it doesn’t mean the company needs to shut down any ongoing projects or even stop planning new ones. Due to stress testing, the company will know how long its reserves can last at different cash flow levels. This also tells the management if they can proceed with current projects or new projects.
Because liquidity and cash flow levels are well known during various market events, management is able to determine the impact any fluctuations in cash flow will have on liquidity. Larger negative cash flow fluctuations may hit a trigger point, requiring immediate action from the management.
Our liquidity risk analysis process helps companies know their business cycles more clearly. Seasonality may impact cash flow, which can fluctuate the level of reserves. These fluctuations are part of the business cycle and do not require any adverse actions.
Projecting cash flows is a complex task requiring an experienced team. It is part of art and partly science.
Our skilled team, with years of experience, analyzes the liquidity and accurately link it with cash flow. The analysts at ROP also guides you through the reasons behind the drop-in cash flow causing reserves to eventually reach a point of no return.
Benefit from Research Optimus’s Comprehensive Liquid Risk Analysis
Apart from financial risk analysis and investor relations reports, the benefits of partnering with ROP is the professional liquidity risk analysis service that provides a clear report based on cash flow management. By understanding the amount of liquidity required in various scenarios, a company will also know the amount of positive cash flow needed to maintain reserves.
Additionally, companies can forecast cash flow under various scenarios. If cash flow begins turning negative because of unfavorable market conditions, due to proper stress testing, there will be enough in reserves to ride out the storm. The company will fund operations with reserves until cash flows turn positive again. Once cash flows are positive, reserves can be slowly replenished, and the cycle starts anew. To discuss your scenario and to learn more about our engagement model, contact the Research Optimus team today.