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Overcome Liquidity Risk

Liquidity risk is the risk that one of the most common. In general, liquidity risk can occur for two reasons, namely 1) the assets can not be sold because is less liquid in the market and 2) liquidity risk of the debt, which is not able to pay off debt, or can not obtain low-cost debt. This liquidity risk has the potential to result in a shaky financial condition.

It is important for you to identify weaknesses in liquidity, due to:
• assist you in managing assets in a difficult financial situation even
• ensure that you have a portfolio of assets and a diversified investment and can cover many scenarios of risk

On the other hand, there are also weaknesses in it, namely:
• efforts in identifying weaknesses in liquidity may be take some time and was less important in good financial condition
• require the budget to create and run the process in the management of liquidity

Here are some steps that can be taken to make liquidity risk management:

Liquidity gap analysis
Analysis and projections of cash flow, which then will produce `liquidity gap’ that occurs between the discrepancy between the inflow and outflow in the future. By doing this analysis, the company will be able to know the potential liquidity needs happen in the future.

Contingency funding plans, which include among others:
• framework management and reporting that adequate, where the action is taken when there are existing negative indications, and avoid / mitigate the crisis properly.
• make documentation of management plans, such as alternative sources of liquidity
• evaluate all the scenarios that could happen
• design a communications plan, both internal and external
• a regular source of liquidity is also equipped with a source of contingent
• directors agreed, and management involved

Approach to liquidity stress-testing
This approach first to identify what the risk drivers. Furthermore, predicting bad scenarios that might happen, and measure the impact on liquidity, both outflow and inflow. In this way, then we will know how liquidity position in each scenario.

Doing liquidity risk bearing analysis
Liquidity risk bearing analysis is the analysis that helps the organization to determine the financial capacity to receive different levels of liquidity risk. This analysis evaluates the benefits and costs of various measures ranging from maintaining liquidity risk through risk transfer.

Applying Limit System
Limit system is used to manage liquidity, in order to reserve a certain amount of liquidity can not be used. This system is used to manage liquidity needs in order not to exceed the existing liquidity reserves at a time.

Funding Diversification
Funding not only from one source only, but diversify into the sources of other funding. So, when one source of liquidity drought, there are still other sources.

Liquidity Policy
Implement policies that identify liquidity methods, processes and responsibilities.

Do’s & Dont’s
Do
• analysis of your liquidity conditions
• diversification of funding
• liquidity reporting done on a regular basis
• consider a plan for contingency fund
• make sure that your reporting system is accurate, informative, comprehensive and realistic

Do not
• do not hold a lot of illiquid assets
• do not hold too much cash, too (not optimum)
• Do not ignore the liquidity despite financial condition was good.

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