Liquidity

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Liquidity relates to the ability to turn assets into cash, the markets for those assets, and the related financial risks for organisations.


1. Assets.

A liquid asset is one that can be turned into cash quickly, and without significant loss compared with its current market value.

Cash itself is generally considered the most liquid of all assets.

After cash, the next most liquid asset is often high quality central government debt, for example gilts.


2. Markets.

In relation to a market, liquidity is the extent to which large quantities of the asset traded in the market can be bought or sold at any time - with low transaction costs - and without affecting the market price.


Risk - financial risk - liquidity risk - liquidity risk management & reporting:

3. Short-term financial risk.

Our ability to pay our obligations when they fall due, especially in the short term.

This can include paying out of confidently expected future receipts and short term borrowing facilities - both committed and committed - as well as making payments from our cash in hand and the liquidation of other relevant current assets.


Cash flow forecasting is a fundamentally important tool for working on organisational liquidity.

Working capital management is another closely related area of work.


4. Medium-term & longer-term financial financial risk.

Our ability to source additional funds to meet our obligations, including in the medium and longer term.


5. Liquidity risk management & reporting.

In the context of risk management & reporting, liquidity metrics are financial measure designed to quantify our ability to meet our obligations when they fall due.

  • For non-financial organisations, very simple measures of liquidity include the current ratio and the quick ratio.
  • For banks and other financial institutions, liquidity measures include those which identify how long the bank could survive if wholesale funds were to dry up, and retail funding were heavily stressed. This period - during which our bank would survive - is known as our survival period.


See also


Other resources