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Discover Everything You Need to Know About Liquidity Management

Most small and medium-based enterprises (SMEs) and large businesses face issues related to liquidity, which may be from overdrafts for paying suppliers and holding surplus cash received from customers. They find it challenging to utilize liquidity efficiently due to cross-border transactions, regulatory environments, changing banking practices, and different time zones. Banks, like DBS, help simplify the problems through liquidity management solutions.

Banks offer their corporate clients services like liquidity management to enable them to pool funds from several accounts and optimise interest on their current or checking accounts. As a result, corporate clients can effectively manage the day-to-day liquidity of their businesses.

‘Account structures’, which serve as the foundation of liquidity management represent the corporate strategies used to organise account relationships and relationships of accounts in a hierarchical group.

The process can be made easier with liquidity management solutions, combining cash concentration and notional pooling structures. Your daily business operations are automated using secure technology in this process, thereby, allowing your management team to concentrate on long-term business goals. Further, banks offer comprehensive liquidity solutions in all major currencies that fit the structure and objectives of your business while assisting in reducing complexity. For it, they employ fully automated, secure, and proven liquidity management methods.

Liquidity management services fall under two major categories:

  1. Sweeping: It is the process of physically moving money from a parent to a child or a child to a parent within an account structure.
  2. Pooling: There is no physical movement of funds in this process. Instead, notional consolidation of account balances is carried out, even for interest computations.

The sweeping method includes:

Cash Concentration

Under the cash concentration method, funds are automatically transferred between accounts, meeting each sub-account’s target balance. Cash concentration methods include:

  • Zero balance: This method involves the automatic transfer of all sub-account balances into the master account with original value dates at the EOD. As a result, the top account will have the total net cash position of the business, and the parent company typically holds it.
  • Target balance: You can find two types under target balance, and they are:
  • Minimum balance/Constant target balance – In this case, the system moves the balances from the sub-accounts to the main account and vice versa to make sure that a certain amount is present in the minor account. The sub-account balances will remain the same, without becoming zero.
  • Fixed target balance – When moving money from sub-accounts to the main account, the system makes sure that a fixed target balance is there. The two-way sweep from the main account to the sub-account will be equal to the debit amount on the sub-account, thus bringing the sub-account to zero balance when it has a debit balance.
  • Fixed sweep: Regardless of the credit balance in the sub-account, a set sum is sent from this account to the main account. No transfers are affected if the credit balance in the sub-account is less than the predetermined amount.
  • Percentage: Here, a predetermined percentage of money in the minor account is swept out.
  • Investment sweeps: Funds are moved out to invest in money market instruments or term deposits.

Notional Pooling

Balances on multiple accounts remain in notional pooling; instead, cash balances across different accounts are optimized with no physical fund transfers. The cost of overdrafts is reduced on participant accounts with the bank accounting interest on the net balance of the pooled notional accounts.

Without actually transferring money, a corporate parent can choose to have the combined debit and credit balances of multiple accounts grouped to calculate interest on those balances using the method of Notional Pooling. It is a suitable liquidity management solution for businesses with decentralised organisational structures that want to give their subsidiaries autonomy on some things, including managing their bank accounts.

The bank accounts of pool participants are combined for interest compensation. Funds are conceptually combined instead of moving physically. However, there is no mixing of funds to keep the integrity of each individual account position. Cash concentration structure and notional pooling can be integrated into a framework to provide complete overlay structures to satisfy the complex requirements of an organisation.