What is Liquidity
In a broad scope, Liquidity is referred to all current assets of a company including cash, inventory (materials, products, and finished goods), account receivables, securities, pre-payments etc. Liquidity can also be specifically referred to Net Working Capital (Current Asset minus Current Liability). The amount of net working capital determines the position of liquidity of the company. The more the net working capital, the more the current assets. As a result, the company has better capability to pay off short term debts and enjoys higher credit standing. This would also make it easier for the company to raise funds in capital market, and for a more favourable pricing.
About
Corporate Risks and Needs..
Liquidity Risks
Credit Risks
Funding and Trade Financing
02
Credit Risks
Another kind of liquidity problems occur because of the company’s credit management. Some companies were aggressively seeking sales growth and often ignore huge pile up of account receivables. Worse still, it often turned out that the receivables were not in good in view of the no so good credit standing of the buyers. Driven by the sales target, many suppliers had offered long credit terms which led to problematic DSO (days of sales outstanding). The worst-case scenario was that management bet on non-occurrence of buyer defaults despite the substantial credit risk exposure.
Account Receivables vs Revenue
AR Credit Exposure
Inventory and DSO
Credit Terms and DSO
Buyer Portfolio Quality
Loss History
AR Management System
Risk Mitigation and Solutions
01
Liquidity Risks
Most companies running into liquidity problems not because of their lack of financial or accounting knowledge. Many companies do not have a well established technology system to monitor the live status of vital liquidity issues such as cash flow, net working capital, account receivables, or due of debts, etc. Quite often when problems come up to the executive level of the company, it is too big and too late to solve.
Liquidity Risk Received Inadequate Governance
Working Capital Management
Inventory and DSO
Liquidity Risk Management
Integrated Cash Flow Management