Cash & Liquidity Management
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Keeping the Liquidity Tap On

by Helen Sanders, Editor

The liquidity crisis, which indeed it has been, has seen the liquidity tap (faucet) gradually turned off since the summer of 2007. Not only has the flow been reduced, but the cost of liquidity has increased dramatically. September 2008 saw a sharp reduction in flow, leaving just a dripping tap into an empty sink. Nearly a year on since Lehmans, where are we now? There have been signs of recovery and the elusive hand of the markets (and to some extent governments) may gradually be turning the tap back on, but costs remain high and firms are jostling to fill their cups from the trickle and there is not enough to go around. Where are firms today from a liquidity perspective, and what should their focus now be? While the free flow of liquidity could, with hindsight, perhaps not have continued indefinitely, treasurers today are far more aware of the need to manage their liquidity risk closely, perhaps the most considerable change in treasurers’ approach to liquidity in the past twelve months.

Cash and liquidity management has always been an important consideration for treasurers, but this has been more operational than strategic in approach. The squeeze on credit has made treasurers starkly aware of the need to identify, measure and manage liquidity risk, which has changed many behaviours, not least the focus on accessing liquidity internally where possible, as opposed to relying on external lenders. Steve Everett, Director of Balance Sheet and Operating Assets at Northern Trust summarises the key liquidity concerns over the past year,

"We would identify three key issues for corporate treasurers from the perspective of liquidity management: firstly, financing and diversification of funding sources; cash forecasting and treasury management infrastructure efficiency; and cash investment/risk management practices."

He continues,