What is Liquidity?

Alexa Cook: 

Hey guys, welcome to The Treasury Update Podcast-Coffee Break Sessions, the show where we cover foundational treasury topics and questions in about the same amount of time it takes you to drink your coffee. 

Alexa Cook: 

This is Alexa, your host. I’m a consultant at Strategic Treasurer and I’m joined today by Craig Jeffrey, managing partner at Strategic Treasurer. So welcome Craig. 

Craig Jeffery: 

Hey, Alexa. 

Alexa Cook: 

So today we’re going to take a look at answering what is liquidity. I have to say I’m really excited to do today’s topic since whenever I was in treasury or first starting out in treasury, I always thought liquidity was such a fancy word and it was almost intimidating until I knew what it meant. So I’m just really happy to walk through this one today with you, Craig. So to kick it off, what is liquidity? 

Craig Jeffery: 

Yeah, so what is liquidity? Liquidity is the ability to use financial instruments like cash to address your needs. But liquidity looks at cash and near cash. Most people think of liquidity in two ways. The short term view, this is your short term cash position, your cash activity. And then other people look at liquidity in a longer term view and they look at their balance sheet works. But we tend to focus on the short term view. What cash do I have or what cash will I have and will I need over a shorter term horizon? Let’s say, the next week, the next month, but certainly within a year or less. 

Alexa Cook: 

Okay, so that leads right into the next question, which is what is a liquidity position? And I feel like you sort of started to outline what that is. 

Craig Jeffery: 

Creating liquidity position or a cash position or a cash position worksheet or a cash decision worksheet, whether it’s done in a spreadsheet or whether it’s managed in a bank platform or a treasury related system. This is a view to your most liquid assets. So this would be, what do I have in the bank? What’s coming due today that I need to pay? What income do I expect or cash coming in today? And then what are my decisions going to be? 

Craig Jeffery: 

So do I have more money to pay down debt or pay down my lines? Do I need to tap into those lines? So the concept of liquidity position looks at cash, near cash and access to capital. So what flexibility do I have? And why do they create a liquidity position? That’s the only way you can really tell, otherwise you’re just guessing. 

Craig Jeffery: 

So all of the best companies run and manage liquidity position. The short term, whether it’s for a month or whether it’s up to a year, all leading organizations track their liquidity position to optimize what they’re doing to make sure they have enough cash to support their business as needs come due. 

Alexa Cook: 

Okay. So if I’m looking at my wallet, maybe my most liquid or my liquidity position would be my cash on hand. And then maybe any credit cards that aren’t at their limit. Right? It’s adding up all of the available funds. 

Craig Jeffery: 

Yeah. All the funds you have access to. Right? So the cash in your wallet and like you said, your credit card or your debit cards where you can pull stuff from. 

Alexa Cook: 

All right. Why is it better to have liquid assets or the cash in my wallet on a practical basis? 

Craig Jeffery: 

Yeah. Versus, like a receivable? I mean, I guess it depends on what you’re looking at. So it’s better to have something that’s more liquid, than less liquid because you can use that to pay down debt or pay off obligations as they come due and that’s important. That’s easier, it’s better. And so that was a little bit of a trick question, but yeah. I mean better, more liquidity tends to be better than less liquidity because of those reasons, but that’s within a certain limit, of course. 

Alexa Cook: 

Okay. So that again, leads to the next question, which is, is higher liquidity good or what is the correct amount of liquidity? 

Craig Jeffery: 

Yeah. So yeah, what’s the right amount of liquidity? That will depend on the organization and what their needs are, how volatile they are. Is the organization seasonal or they seasonal cash flows? What’s the mix between different parts of their business? So the correct amount is to make sure you have an adequate cushion for the unexpected or the expected unexpected activities that occur. 

Craig Jeffery: 

There’s always surprises that happen. What are those and making sure you’re covering that. So organizations need and want to keep a margin there. A comfort level, whether that’s handled through a credit facility or extra cash that they have. That’s a crucial part of avoiding the nervousness that can resolve if you’re too close to the line. And so those levels can differ for company. 

Craig Jeffery: 

Some company has a very stable set of cash flows on the inbound and outbound side, find it very easy to go a little tighter because they don’t have volatility. Other organizations are deal oriented, so large sales generate lots of cash flows and there could be a time of relatively sparse cash inflows. So they have to be able to handle that type of volatility, cash flow volatility so it can differ. 

Alexa Cook: 

And then I guess my last question, I feel like we’ve touched on it a few times, but I’m still going to ask it just in case you want to add anything else. And it’s why is visibility so important when it comes to liquidity? 

Craig Jeffery: 

Yeah. I mean liquidity, knowing the liquidity you have requires visibility. Visibility is a cornerstone to having that comfort to say, what do I have in the short term? I have to be able to see what do I have in my credit facilities, in the banks? I need to be able to see oftentimes what’s in my working capital elements, like receivables and payables. 

Craig Jeffery: 

So I have to have good quick visibility to that to make proper decisions and not have to leave excessive balances. So if I’m not seeing what’s in certain accounts across the globe till the end of the month or on a weekly basis, I have to make sure there’s a larger reserve there because I don’t know. I can’t monitor it. Real time or near real time or daily visibility is very important for liquidity cause it allows you to get a sense of your position at one point in time. 

Alexa Cook: 

So I guess, I’ll just recap what we’ve covered today on what is liquidity. And I guess to define what liquidity is, I’m going to go back to my wallet example. So liquidity or the most liquid items in my wallet are going to be cash on hand. And then following that would be anything available, maybe on a debit card and then following that would be anything available on a credit card. 

Alexa Cook: 

But really it’s just the liquidity in total would be everything that’s available to use within that wallet. Good liquidity or a correct amount of liquidity would be, it’s going to vary by company, by industry, all of that. But an adequate question for the expected, unexpected situations that come up. Right, just to make sure you have a buffer from a safety perspective. 

Craig Jeffery: 

Yeah, it is. And if we were doing a longer session, we could talk about core liquidity and then some of the other buckets that people look and manage their portfolio in. But that’s certainly a good start for the Coffee Break Sessions on liquidity. 

Alexa Cook: 

Wonderful. Well, thank you for joining me today, Craig. I really appreciate it. And for all our listeners, make sure you tune back every first and third Thursday of the month for a new Coffee Break episode. And if you ever have any comments, questions, or feedback, feel free to send us an email at podcast@strategictreasurer.com 

OUTRO: 

This podcast is provided for informational purposes only and statements made by Strategic Treasurer LLC on this podcast are not intended as legal, business consulting or tax advice. For more information, visit and bookmark strategictreasurer.com.