In finance, liquidity means cash or cash inflow and liquidity risk means risk of not receiving cash at the time when we need it. Its other name is cash risk. We can understand this risk in two ways.
#1 No value of Asset
When, you want to sell the asset and you receive nothing. It means there is no value of asset. If your asset have some value but it may possible that it can become worthless in future. The risk of this loss will be liquidity risk. Because after becoming nil market value assets, you will not able to get cash or liquid.
For example, you have bought 500 shares any company but after downfall in share market, it may possible that next day, your shares will not be bought by any body. So, this risk will be liquidity risk.
# 2. No enough cash in pocket
If you did not manage and cash properly, it may possible that in future you have to pay your expenses but there is no money in your pocket. At that stage your business may bankrupt.
Two Major Reasons of Liquidity Risk
1. No Proper Cash Management
It is first major reason of liquidity risk. If your cash management system is not good, it is sure that you will face this risk. I can take example of bank. If bank manager does not keep some reserve for immediately withdrawal of money, bank also suffers liquidity risk.
2. No Proper taking of Investment Decisions
Few days, ago, I have given many tools of investment analysis like NPV, IRR and MIRR and P.I. and real asset analysis. If an investor invests his money with selection of good investment proposal, these risks are become uncontrollable.
Liquidity Risk Management
Like wise man, if you have to manage liquidity risk, you should keep good understanding of the tools of liquidity risk. If you learn better control on cash and fund, you can save your organization from liquidity risk. If we do not properly manage liquidity risk, it becomes major financial disaster. There are many testing with this you can measure your liquidity risk and after this we can quantify using stochastic modeling techniques.
#1 No value of Asset
When, you want to sell the asset and you receive nothing. It means there is no value of asset. If your asset have some value but it may possible that it can become worthless in future. The risk of this loss will be liquidity risk. Because after becoming nil market value assets, you will not able to get cash or liquid.
For example, you have bought 500 shares any company but after downfall in share market, it may possible that next day, your shares will not be bought by any body. So, this risk will be liquidity risk.
# 2. No enough cash in pocket
If you did not manage and cash properly, it may possible that in future you have to pay your expenses but there is no money in your pocket. At that stage your business may bankrupt.
Two Major Reasons of Liquidity Risk
1. No Proper Cash Management
It is first major reason of liquidity risk. If your cash management system is not good, it is sure that you will face this risk. I can take example of bank. If bank manager does not keep some reserve for immediately withdrawal of money, bank also suffers liquidity risk.
2. No Proper taking of Investment Decisions
Few days, ago, I have given many tools of investment analysis like NPV, IRR and MIRR and P.I. and real asset analysis. If an investor invests his money with selection of good investment proposal, these risks are become uncontrollable.
Liquidity Risk Management
Like wise man, if you have to manage liquidity risk, you should keep good understanding of the tools of liquidity risk. If you learn better control on cash and fund, you can save your organization from liquidity risk. If we do not properly manage liquidity risk, it becomes major financial disaster. There are many testing with this you can measure your liquidity risk and after this we can quantify using stochastic modeling techniques.
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