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Liquidity Management

Liquidity Management

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Published by: nikhil198924 on Mar 07, 2010
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05/23/2013

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FOCUS ON LIQUIDITY MANAGEMENT
INTRODUCTION
We often hear the word liquidity used in combination withcash management. Liquidity is a firm's ability to pay its short-term debtobligations. In other words, if the firm has adequate liquidity, it can pay its current liabilities such as accounts payable. Usually, accounts payable are debts owe to our suppliers.There are methods we can use to measure liquidity. Financial ratioanalysis will help us determine how liquid firm is or how successful itwill be in meeting its short-term debt obligations. The current ratiowill help us determine the ratio of current assets to current liabilities.Current assets include cash, accounts receivable, inventory, andoccasionally other line items such as marketable securities. We needto have more current assets than current liabilities on our balancesheet at all times.The quick ratio will allow determining if we can pay your short-termdebt obligations, or current liabilities, without having to sell anyinventory. It's important for a firm to be able to do this because, if wesell have to sell inventory to pay bills that means we have to find a buyer for that inventory. Finding a buyer is not always easy or  possible.There is various other measure of liquidity that you will want to use todetermine our cash position.When your business is just starting up, we essentially run it out of acheck book, which is an example of cash accounting. As long as thereis cash in the account, our business is solvent. As business becomesmore complex, we will have to adopt financial accounting. However,we have to keep a focus on liquidity and cash management eventhough our track net income through financial accounting.
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FOCUS ON LIQUIDITY MANAGEMENT
PURPOSE
This document sets out the minimum policies and procedures thateach institution needs to have in place and apply within its liquiditymanagement programme, and the minimum criteria it should use to prudently manage and control its liquidity.Although this document focuses on the institution’s responsibility for managing liquidity, and is intended to address liquidity managementwithin the context of a strategic liquidity plan under ordinary or reasonably expected business conditions, liquidity managementcannot be conducted in isolation from other asset/liabilitymanagement considerations, such as interest and foreign exchangerate risk, or other risks. However, since liquidity determines the day-to-day viability of an institution, it must remain the principalconsideration of asset/liability management.Moreover, this document presents the management of liquidityundifferentiated as to currency denomination, since in principle,through the foreign exchange markets, commitments in one currencymay be met by the availability of funds in another. However,institutions that conduct substantial business in foreign currenciesneed to make distinctions between the management of liquidity indomestic currency (Jamaican dollars) and that in other currencies.
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FOCUS ON LIQUIDITY MANAGEMENT
DEFINITION
Liquidity is the availability of funds, or assurance that funds will beavailable, to honour all cash outflow commitments (both on- and off- balance sheet) as they fall due. These commitments are generally metthrough cash inflows, supplemented by assets readily convertible tocash or through the institution’s capacity to borrow. The risk of illiquidity may increase if principal and interest cash flows related toassets, liabilities and off-balance sheet items are mismatched.
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