Whether your company is a large or small business, maintaining positive working capital is essential. A company with negative working capital is at risk of running out of cash and having to take on debt or sell assets in unfavorable terms.

Effective liquidity management involves a clear view of upcoming obligations and understanding how quickly your company’s short-term, medium-term or long-term assets can be converted into cash. This is an art and a science.


Corporate Liquidity Management and Cash Management refer to the techniques and practices employed by firms to increase their liquidity, improve their working capital and reduce risk. They include fast cash positioning, real-time cash modeling and forecasting, and liquidity risk management.

Effective cash and liquidity management is a vital part of creating and sustaining a company’s financial stability. It ensures the firm has the funds it needs to meet short-term obligations, such as payroll and bills, and long-term commitments, such as repaying loans and increasing capital.

Cash is the primary asset individuals and companies use to pay short-term debt obligations and operating expenses, including taxes, employee salaries, inventory purchases, advertising costs, and rents. In addition to these day-to-day activities, cash also plays a role in investing for future growth.

Types of liquidity

Cash is an essential part of running a business. It is necessary for paying vendors and ensuring that you can continue to keep your operations going day in and day out.

However, the amount of liquidity a company has is more complicated than just looking at its bank account. It also includes examining your company’s assets and understanding how quickly they can be converted into cash to pay for short-term debts.

A business’s liquidity is dependent on having a clear view of its short-term, medium-term and long-term obligations. It also means understanding how easily assets can be converted into cash to meet these obligations, and matching the maturity of a company’s investments with their timings so that there is always sufficient cash available.

Short-term liquidity

Liquidity management is a core function of corporate treasury and finance teams. Without adequate liquidity, companies could become unable to meet obligations or go out of business.

Financial institutions use a number of ratios to measure a firm’s current liquidity. The most common is the current ratio, which is calculated by dividing current assets (less stocks) by current liabilities.

Short-term liquidity can be tapped by businesses for various purposes, such as covering debt obligations or investing in growth opportunities. A company’s balance sheet can also help a finance executive determine how liquid its cash is, depending on whether it can be converted quickly into other financial instruments that are more time-sensitive.

There are many factors that affect a company’s ability to access liquidity, such as market risk. This can include changes in interest rates or prices in financial markets.

Long-term liquidity

Keeping track of cash balances is an important part of managing a company’s financial health. It helps ensure that cash is available when needed, so a company can pay its employees and suppliers.

A company’s liquidity is also important for paying its creditors. Liquid assets should be greater than short-term liabilities. This is usually measured by a current ratio and a quick ratio (also known as an acid-test ratio), both of which measure the company’s ability to meet its short-term obligations.

Corporate treasury and finance teams that prioritize liquidity planning and controls can help ensure firm liquidity. But to do so, they first need visibility into their cash position and future expectations.

Netting portfolio management

Netting portfolio management is an effective liquidity management tool for large multinational companies. It helps centralise foreign exchange (FX) exposure, funding and liquidity requirements for optimum corporate decision making.

Typical uses of netting include currency transactions and OTC derivatives (off-the-shelf instruments that do not trade on an exchange). Novation netting cancels offsetting swaps and replaces them with a new contract for the net amount.

Netting is also an effective technique for simplifying third-party invoices. It reduces the number of invoices that need to be sent to a single company, ultimately saving time and money by reducing the transactions down to one.

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