All About Liquidity Management

by Dwayne Buzzell Forex

1.       An introduction to Liquidity Management

Liquidity is known as the ability of an institution to meet cash and collateral obligations without incurring substantial losses. Liquidity Management is hence a critical agenda item within organisations’ prioritizing activities. It is the financial obligations through cash flow, funding activities and capital management.

2.      The Importance.

When looking at Liquidity Management, there are several key facts that form the importance of having Liquidity Management in place.

In accounting terms, it is called operating cycle in which liquidity is needed to continuing flow from receivables of sales to cash, maintaining a healthy cycle. Any institution develops a successful collection programmer is market winner.

Liquidity Management helps with business decision-making, many boards now require management to provide quarterly or more frequent liquidity updates, often with cash forecasts and credit facilities for the use of potential investments and profitable loan. A business with adequate liquidity has less risk of being unable to meet their obligations, improving profitability through reduced interest expense or increased interest income, eventually comes a financial flexibility.

3.       The Policy.

Every institution should have a formal liquidity policy that is established within the organisation to support efficiency.


The Policy should answer a few questions.

Who is responsible for liquidity management? What is the general methodology of Liquidity Management? And how is it monitored?


The Policy should therefore be the tool of minimising idle working capital, optimally manage liquidity risk and enhance the values and ability in liquidity pools.

4.      Relationship between Liquidity and Profitability.

The link between Liquidity and Profitability is where business has enough liquid resources; gets benefit of cash discount on purchases hence increases in profits. It is also profitable when higher balance of cash increases interest income and minimise interest expense.

The purchase of profitable loan is always an opportunity. Financial institutions offer loans with higher potentiality of easy recovering with long duration is regarded as profitable loan hence sufficient cash balance required.


5.      What Liquidity Management means in Business.


Liquidity Management involves in a daily analysis, which ensures that the institution maintain sufficient cash and liquid assets upon cash demands.

Businesses represent their financial statements to investors, lenders and managements using liquidity measurement ratios to evaluate liquidity risk. This implies management should strive to reduce the gap between their cash on hand and their debt obligations or manage liquid assets vs short-term liabilities such as loans. As loans are repaid based on maturity terms then the interest rates can be adjusted towards profitability.

Businesses such as banks and governmental institutions are highly dependent on regulations and current economic situation. Currently banks are facing lack of communication between themselves and the businesses. Regular communication in this way are necessary which will give the banks a better picture and greater confidence in dealing with businesses.

Governmental institutions are appeared to control taxes, revenues and being a financial assistance to public demands. It is the key role of having Liquidity Management internally to then impact on planning, decision making and regulating.

Methods to manage liquidity risk

Cashflow forecast

Liquidity risks are heavily dependent on cash flow management including optimising working capital and by maintaining unused resources.

The base on cash forecasts provides significant or best estimate cash in and out flows. For example, businesses may look at revenues and expenses forecasts as an assumption guidance that will illustrate short and long-term picture of the businesses hence assisting management for better decision making i.e employment turnover ratios, interest rates, foreign currency rates, counterparty default rates and product margin etc.

 Optimizing working capital

In recent days, it is important for businesses to ensure cash is available for upcoming opportunities. If we think about the majority of large businesses, the need of profitability is connected to increasing cashflow visibility.


Better processes, better insights, better planning.

Remember Working capital is interest free and comes with no conditions. To ensure that good results retain and are consistent, the capital invested in management of cash is prioritised in each business. Cash management maybe regarded as the art that assists in establishing liquidity and profitability to ensure undisruptive incidents to work towards business’s goals. 

About Dwayne Buzzell Innovator   Forex

17 connections, 0 recommendations, 69 honor points.
Joined APSense since, July 1st, 2016, From Oakland, United States.

Created on Sep 27th 2017 09:11. Viewed 964 times.


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