These past 18 months have proven to be unprecedented, with companies facing difficult credit conditions and unexpected challenges. Management teams and boardrooms around the world have woken up to the fact that in today’s economic turmoil, cash is king and business leaders are now looking to effective cash management as a top priority; and companies are taking the opportunity to change their cash management habits and give more thought to how they utilise what is arguably their most important asset.

However, before businesses start putting their cash management system in order, they should ensure that their bank has the infrastructure and the capital to serve their needs long term. For many companies there is a real concern that the bank that provides their cash management services may not survive the current shake-out of the financial industry, and this has obvious implications in terms of counterparty, operational and informational risks.

Another aspect SMEs should also watch for is whether their bank is investing in technology and in the expansion of its network. A longer term concern is the risk of technology underinvestment by some of these institutions – where available cash management tools and technology will increasingly lag behind those being used by businesses dealing with one of the better-capitalised banks such as HSBC. At HSBC we continue to invest in our overseas network and our technology, so as to better serve our customers.

So before you start making adjustments to your cash management policies, make sure you have selected the right banking partner – one with the network and technology to support your company’s growth.

In the current economic climate, robust cash management is not only a matter of immediate survival, as it will help improve internal liquidity and manage working capital more effectively, but it also offers opportunities as a potential competitive tool for the future.

The primary objective of cash management for many SMEs is to maximise their use of internal funds, irrespective of geography or business structure. This objective takes two forms. First, the need to avoid the cost of cash shortfalls that could be covered by surplus funds held elsewhere. And second, avoiding the lost opportunities that come from having idle balances delivering sub-par returns.

An associated objective is the desire to reduce the “access risk” of being reliant upon markets or third parties for liquidity. In an increasingly regulated world, the costs and penalties associated with compliance failure are far too severe to be neglected.

Finally, there is the desire to reduce the overheads relating to the underlying end-to-end process. In an ideal world, the degree of human intervention required for cash pool administration should be minimal, with resilient automated processes taking the strain instead.

Finally, there is the desire to reduce the overheads relating to the underlying end-to-end process. In an ideal world, the degree of human intervention required for cash pool administration should be minimal, with resilient automated processes taking the strain instead.

With limited credit availability and pricing of external liquidity sources at levels not seen for more than a decade, companies with ready access to inexpensive internal liquidity enjoy a major competitive edge. Indeed, they can exploit the spread expansion that has occurred between the cost of internal and external liquidity as a working capital cost advantage.

Another key focus for all SMEs should be their accounts receivables. While always important, in tough economic conditions the efficiency of the accounts receivable (AR) function becomes critical, and SMEs should review all their AR policies and ensure they are complied with to secure cash as early as possible.

If you do not manage your debtors correctly you can end up subsidising your customer’s business at your own expense. Your AR procedures can be supported effectively by bank innovations in the area of receivables advising and receivables reconciliation solutions – solutions which HSBC holds a leadership position in delivering.

For SME owners and their CFOs, the time is right to make long term systemic improvements to the way their company treats and think about cash and its associated processes.

Liquidity management is all about the effective use of cash – which makes it a critical concern in the current tough economy. Cash is the lifeblood of small businesses. A company with a proper set of liquidity management policies and procedures will improve profits, reduce the risk of failure and significantly improve its chances of survival. It also provides a strategic advantage especially in difficult economic times. Effective liquidity management will enable an organisation to derive maximum benefits at minimal cost.

The benefits are many and include:
1. Improved cashflow - liquidity management releases the dollar locked in working capital, enabling it to contribute to higher shareholder value;
2. Enhanced profitability - with less funds locked in working capital, there is more money available to fund expansion or growth. Less financing will then be required, lowering interest costs, and increasing the ability to generate higher profits; and
3. Reduced reliance on short-term debt - liquidity management reduces reliance on short-term debt for an organisation’s daily operations. It allows the organisation to use its borrowing power for other purposes such as acquisition and growth.

If you have poor liquidity management then your business will likely suffer from an inability to forecast your short-term and long-term cash requirements. You may even find you are unable to obtain financing due to poor cash flow positions or too high leverage.

Of course, some businesses will benefit more than others from changes to their liquidity management policies. If your company has a lot of bank accounts with numerous banks, then you can expect to benefit from a more streamlined approach.

Another type of SME that will benefit from improved liquidity management is one with high volatility in its cashflow positions, or if they have excess cash-in-transit or cash float locked in operational processes.

If you are unsure whether your company will benefit from new liquidity management procedures, you should consult a bank that specialises in this field.