Liquidity: Difference between revisions

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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.''
1. ''Assets.''


An asset's ability to be turned into cash quickly and without significant loss compared with current market value.
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 the most liquid of assets.
Cash itself is generally considered the most liquid of all assets.


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




2. ''Markets.''
2. ''Markets.''


In relation to a market, 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.
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.


3. ''Short-term financial health.''
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.


An entity’s ability to pay its obligations when they fall due, especially in the short term.
Cash flow forecasting is a fundamentally important tool for working on organisational liquidity.




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


An entity's ability to source additional funds to meet its obligations, including in the medium and longer term.
Our ability to source additional funds to meet our obligations, including in the medium and longer term.




5. ''Financial measures.''
5. ''Liquidity risk management & reporting.''


A financial measure designed to quantify an entity's ability to meet its obligations when they fall due.  
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, simple measures of liquidity include the ''current ratio'' and the ''quick ratio''.
* 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 was heavily stressed. This period is known as the ''survival period''.
* 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''.




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* [[Liquidity swap]]
* [[Liquidity swap]]
* [[Liquidity upgrade]]
* [[Liquidity upgrade]]
* [[Living will]]
* [[Market liquidity risk]]
* [[Market liquidity risk]]
* [[Money management]]
* [[Money management]]
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*[[Media:2015_06_June_-_Safety_first.pdf| Safety first, The Treasurer, 2015]]
*[[Media:2015_06_June_-_Safety_first.pdf| Safety first, The Treasurer, 2015]]


[[Category:Liquidity_management]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:Financial_products_and_markets]]

Revision as of 11:56, 14 March 2024

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.


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

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