Liquidity

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

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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.

"When it comes to investing surplus funds safely, there is one principle I hold very dear: The SLY principle (Security first, Liquidity second and the last consideration should be Return).

This certainly helps in board room discussions."

(Raj Gandhi FCT, former CFO and Group Treasurer.)

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.

3. Risk - financial risk - liquidity risk - liquidity risk management & reporting.

3.1 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.

3 liquidity tips for all treasurers

"All treasurers as well as finance professionals with treasury responsibilities will have recently found that their management teams have developed a welcome preoccupation with the liquidity of their organisation...

In summary, the treasurer can make an important contribution to protecting and enhancing the value of their organisation if they:

Ensure a 13-week rolling cash-flow forecast is produced and updated weekly;

Communicate effectively the outlook and implications of the forecast to stakeholders; and

Are vigilant to the working capital implications as any economic recovery progresses."

Liquidity first: three tips for treasurers, David Tilston.

3.2 Medium-term & longer-term financial financial risk

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

3.3 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.

Liquidity promotes financial agility

"What I know now about liquidity, that I wish someone had told me sooner in my career, is its crucial role for corporate treasurers.

Liquidity, facilitated by money market funds, instruments and deposits, is essential for managing risks and executing corporate strategy effectively.

Liquidity ensures prompt access to funds for meeting financial obligations and seizing strategic opportunities, promoting financial agility and supporting longer-term success."

Djan Salin, Senior Associate, Liquidity Distribution Corporates, Morgan Stanley.

Get it before you need it

"The point at which you really need liquidity is precisely the point at which you will not be able to source it affordably.

Liquidity management is therefore a future-focused, precautionary activity."

Patricia White, Treasury risk training consultant.

See also

• Authorisation
• Authority limits
• Capital
• Cash
• Cash and cash equivalents
• Cash balance
• Cash flow
• Cash forecasting
• Cash pool
• CRD IV
• Current ratio
• Deep market
• Diversification
• Emergency liquidity assistance
• Financial risk
• Financial risk management
• Flight to liquidity
• Funding
• Funding liquidity risk
• Funds
• Gilts
• Headroom target
• Illiquid
• Individual Liquidity Guidance
• Insolvency
• Leverage
• Liquid
• Liquidate
• Liquidation
• Liquidity buffer
• Liquidity Coverage Ratio
• Liquidity fee
• Liquidity Fund
• Liquidity gap
• Liquidity gate
• Liquidity insurance
• Liquidity investment
• Liquidity management
• Liquidity management tool
• Liquidity preference
• Liquidity premium
• Liquidity ratio
• Liquidity risk
• Liquidity run
• Liquidity stress
• Liquidity stress test (LST)
• Liquidity swap
• Liquidity upgrade
• Living will
• Market liquidity risk
• Money management
• Net Stable Funding Ratio
• Overall Liquidity Adequacy Rule
• Quick ratio
• Risk
• Risk management
• Risk reporting
• Run
• Security
• Solvency
• Standby liquidity agreement
• Stress
• Supply chain finance
• Survival period
• Working capital management
• Yield

Other resources

• Practical liquidity management for treasurers
• Unlocking the value of liquidity - Association of Corporate Treasurers
• Liquidity first: three tips for treasurers - David Tilston FCT - The Treasurer Web exclusive, 2020

• Safety first, The Treasurer, 2015