Disconnect between departments
Another common liquidity challenge is the disconnect between the treasury and sales or procurement teams. Salespeople may be willing to offer extended payment terms to buyers to close a deal, without realising the wider impact this can have on the business. “Extending payment terms from 60 days to 90 days can cause liquidity management issues for the group treasury,” says Vesa Paukku. “That’s a typical problem.”
And it’s not just the misalignment of goals and priorities that can cause problems. Sales teams may not have the tools or expertise to perform accurate cash forecasting, and this can create significant issues for the group treasury. “The treasury is responsible for the whole company’s liquidity, but this is pretty much impossible if it doesn’t get accurate predictions about cash flow or income,” says Paukku.
“Selling is easy if you don’t have to worry about the payment,” agrees Karhapää. He suggests the implementation of shared KPIs, which can help sales teams to understand that every day a payment term is extended has some cost to the treasury. “If the person who makes the sale is not responsible for following up when payment is due, it’s a bad combination. So I think connecting some payment term KPIs to the sales process is very important.”
In practice, implementing shared KPIs involves a new level of cooperation between the treasury, sales and procurement. “The group treasurer needs to participate in strategic discussions and spread knowledge of working capital to other parts of the company, where it may have traditionally been ignored,” says Paukku.
Challenges are amplified for small businesses
Many of these challenges are amplified for small to medium-sized enterprises (SMEs). “If you’re a small, growing company, you’re trying hard to win big deals. But because you don’t have a good competitive position, you might not have much freedom to negotiate on payment terms,” says Antti Laakso, Head of Bank Sales at Nordea.
While it’s already on the agenda of most corporate organisations, growth companies may not realise the importance of liquidity—at least until they encounter bad economic times. It’s easy to turn a blind eye to it while things are going smoothly, only to be caught out later warns Laakso: “Even if risks aren’t a present concern, companies will eventually need cash to pay the bills.”
While offering generous payment terms may help to secure trade deals, it also causes accounts receivable lists to grow. This can have a direct impact on a company’s liquidity position, and often cannot be balanced with their accounts payable. Cash flow planning, active working capital management and collaboration with the sales department about payment terms are crucial. “That’s something you really want to look after,” Laakso says. “Making sure you have a healthy balance sheet and the right size liquidity buffer.”
Liquidity management solutions
It’s clear that liquidity management can be a challenge for organisations of all sizes—whether it’s because of international trade risks, disconnect between departments or compromising on payment terms to stay competitive. Fortunately, there are a range of tools and solutions that can improve efficiency in working capital management, and these are becoming increasingly sophisticated.
Nordea has formed a Working Capital Management (WCM) team to help customers of all sizes find the appropriate liquidity solutions. Tools offered for corporate businesses include cash forecasting and dedicated supply chain financing. For smaller businesses, Dynamic Discounting is a programme which allows buyers to receive a discount in return for prompt payment, helping to improve liquidity for the seller.
But it’s important to note that there’s no one-size-fits-all approach to working capital management. “Every solution is different depending on the needs of the company,” says Karhapää.