Liquidity Management

Liquidity Management- Liquidity management is a collection of ongoing strategies and methods that guarantee your business is able to access cash as needed — to pay for goods and services, prepare payroll, and invest in new opportunities that arise.

Liquidity management takes one of two forms based on the definition of liquidity. One type of liquidity refers to the ability to trade an asset, such as a stock or bond, at its current price. The other definition of liquidity applies to large organizations, such as financial institutions. Banks are often evaluated on their liquidity, or their ability to meet cash and collateral obligations without incurring substantial losses. In either case, liquidity management describes the effort of investors or managers to reduce liquidity risk exposure.

Investors, lenders, and administrators all look to a company’s financial statements relating to liquidity measurement ratios to evaluate liquidity risk. This is usually done by comparing liquid assets and short-term liabilities, determining if the company can make excess investments, payout bonuses or, meet their mortgage commitments. Companies that are over-leveraged must take steps to reduce the gap between their cash on hand and their debt obligations. When companies are over-leveraged, their liquidity risk is much higher because they have fewer assets to move around.