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What is liquidity management and what are the different ways of dealing with unexpected deposit outflows?

What is liquidity management and what are the different ways of dealing with unexpected deposit outflows?

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Liquidity management is practice every business follows that ensure it is able to access cash as needed, to pay for goods and services, make payroll and invest in new opportunities. The strategy means your business has a plan for meeting its short-term and immediate cash obligations without experiencing significant losses. The planning is important and involves finance managers looking to the company’s balance sheet to evaluate by comparing liquid assets and short-term liabilities, determining if the company can make excess investments. From an investment perspective, liquidity ratios are used to attain the valuation of a company stocks or bonds.

Unexpected deposit outflows in banking is dealt by achieving an optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks. Typically, banks hold excess and secondary reserves

Many businesses have extended liquidity and cash forecast requirements to address at least a one-year liquidity management horizon (shift from monthly rolling basis to yearly). The benefits achieved through a longer liquidity window include greater transparency into significant cash outflows. If the liquidity is kept at high level under the fear of not being capable of meeting financial requirements in time and the funds available are not invested is sure to count on losses for no returns on the funds available.

jeff jeffy answered 1 year ago
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