Liquidity Management Issues in Financial Firms

Knowing how to manage the liquidity of a firm is crucial to the survival of a company. An institution should be able to generate enough cash to meet all its obligations. Company liquidity can easily be affected when there is a reduced or dragged cash inflow. However, an increase in cash inflow leads to increased liquidity. As the CFO, it is essential to ensure that the bank is not prone to any liquidity management issues, therefore, cash inflows and outflows have to be managed properly.

One of the main factors that may lead to liquidity in the bank is the ratio between the cash deposited and cash withdrawn. There has to be a balance between the money that is coming in and the money being withdrawn by the customers. The bank should make people save more money through different initiatives.

Another issue that would lead to liquidity constraints in the bank is bad debt in the books of accounting. Knowing how to manage the debts, will highly reduce the incidence of liquidity challenges. The bank will improve how it loans companies by doing due diligence to avoid bad debts and making sure that everyone pays.

The ideal way of avoiding liquidity management issues is by ensuring that the cash inflow is always higher than the outflow since cash is the greatest liquid form of asset. Make sure people or companies borrowing pay back the amounts owed on time. Finally, incentivizing more people to save than borrow will increase the bank’s cash flow, hence increasing liquidity.

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