In this article, we would like to tell you about liquidity risk. What is liquidity risk? What can we face if it is not followed well?
In this article, we would like to tell you about liquidity risk. What is liquidity risk? What can we face if it is not followed well?
Liquidity shows the ability of companies to pay their commitments in cash. Firms that are liquid both get loans more easily and are not seriously affected by surprise market conditions. For example, people and institutions that have enough deposits to meet the commitments of the next 2-3 months are considered liquid and their creditworthiness is also high.
What happens when the liquidity balance of firms deteriorates?
Firms may lose their ability to pay cash for various reasons. Then they either cannot pay the installments on the loans they have received, or they cannot deposit the necessary cash to the bank for their overdue checks. At that time, there will be a lot of problems in the legal dimension, from the closure of the company’s credit lines to the size of the foreclosure.
How does the firm’s cash balance deteriorate?
This process sometimes happens slowly, and sometimes very quickly. The company’s monthly cash collection and commitment to pay above the maturity distribution of customer checks in its possession means that it is gradually entering this path. Excessive payment obligations that coincide with the same period due to suppliers’ shortening of deadlines, as well as market stagnation, are used as an excuse for customers to extend payment deadlines, which leads to a rapid cash shortage process when they overlap. Especially if it was invested..
Although it seems to be the task of the financing unit to control the liquidity balance of companies and ensure the cash balance, the most important part of the job is sales maturity and payment structure, purchase maturity and payment structure and inventory management. The result of these transactions is determined as the financing cash flow.
Financing at this stage, the bank tries to perform tasks such as establishing limits, ensuring balanced outsourcing, and creating security officers.
A good financing and cash management is possible if all the data of the firm are reported in a healthy way.
Liquidity risk should never be ignored, as it is a dangerous risk that will decimate the entire value of the firm to zero. Otherwise, irreparable harm may occur.
Since managing a company requires that all risks are managed harmoniously, focusing on a single issue may cause managers to overlook other risks. That’s why we’re calling attention..
Best regards,
Hikmet Baydar