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Lecture 5: Cash Flow and Liquidity Management I - Coggle Diagram
Lecture 5: Cash Flow and Liquidity Management I
Part 1: The Concept of Liquidity
What is liquidity (PPT 4 - 6)
Drags and pulls on liquidity
The reasons of a company having negative cumulative CFs: seasonal CFs
Liquidity shortfalls
drags on liquidity are forces that delay the collection of cash:
slow down cash inflow
Pulls on liquidity are decisions that result in paying cash too soon:
accelerate cash outflow
Liquidity risk is not simply cash management risk (CMR), as it is more extensive that just managing the cash function,
CMR is just one element of liquidity risk
Asset side liquidity
(market or transactional liquidity)
what is market liquidity risk
When sell, the price has dropped, prices can move adversely through the actions of buying and selling
There are no willing buyers (equity in a joint venture that is failing)
Also include the variability in the assets that are being used as collateral
different proxies of liquidity in markets with market tightness and depth consideration (PPT 11)
Bid-ask spread
Volume
Liability-side liquidity
(balance sheet or funding liquidity)
Definition: PPT 12
"At-risk" facilities (PPT 13)
Liquidity risk spiral (PPT 15)
A simple perspective of liquidity risk: liquidity shortfalls arise from short-term balance sheet items (PPT 16)
Cash inflows and outflows (PPT 17 - 18)
Part 2: Wording Capital and Cash Conversion
Working capital V.S. Cash conversion (PPT 20 -21)
Measuring the cash conversion cycle
Work-in-process/Inventory period
Accounts payable period
Accounts receivable period
Managing the cash conversion cycle (PPT 24 - 25)
Cash collection example and CCC by industry
Sources of corporate liquidity risk (PPT 28)
2.1 Sources of asset-side liquidity
short term liquid assets (Sources of funding)
Cash
Marketable securities
AR, either through outright sale or pledge of unencumbered receivables
Inventory through outright sale or pledge of unencumbered inventory
Long term fixed assets
leasing agreement
Repurchase agreeements
Asset-side liquidity risk problems
(PPT 31)
2.2 Sources of liability side liquidity
Short term (PPT 32)
Long term (PPT 33)
Other sources of liquidity (PPT 34)
Liability liquidity risk problems (PPT 35)
Liquidity risk in banks (PPT 36)
Sources of liquidity risk in banks (PPT 37)
Asset side
Liability side
Contingent sources
Drivers of liquidity risk in banks (PPT 39)
Part 3: Northern Rock Bank case study
funding long-term mortgage assets (both prime and subprime) with short-term funds, significant reliance on volatile, short-term, wholesale funding
A risky business model: requires a liquid and well-bid securitization market
excessive concentration in risky, correlated securities (securitized home mortgage) that were ultimately illiquid and could only be liquidation at a fraction of their stated value
lack of alternative funding sources for emergency draw-down
lack of contingency funding plan