Liquidity planning with McGing

Liquidity planning

Liquidity refers to how easily assets can be converted into cash. Cash is the most liquid investment. Listed investments such as shares and bonds are very liquid since they can be converted to cash within days. However, large assets such as direct property holdings, infrastructure, plant, and equipment are not as easily converted to cash.

Holding enough liquid assets is critical to businesses to pay outgoings when they fall due. Consideration needs to be given to money coming in as well. Careful consideration needs to be given to cash-flow planning, the willingness and ability to take greater risk and working through scenarios to ensure a Company is sufficiently holding liquid assets. Holding not enough liquid assets could create serious cashflow management issues. Being too liquid could mean that capital could have been more effectively invested or utilised.

We assist our partners in a structured approach with respect to liquidity planning:

Understanding what you have told us

  1. Working capital – understanding past usage of your working capital, your best estimate of future usage
  2. Investments on balance sheet – categories of investments, duration of investments, credit rating of investments
  3. Commitments of the group:
    a.  Loan notes – terms & conditions, maturity dates, coupons, early redemptions, maturity options. Past experience. Best estimate forecast of outgoing payments. What-if scenarios.
    b.  Self-insurance – what is insured. What level is self-insured. Previous history of claims against the type of insurance and exposure. Open cases. Likely claims in the future. What-if scenarios?
  4. Any other items effecting liquidity
  5. What period are you looking at – short term, medium term, long term

Essentially, we would like to understand your future cashflow profile:

  • Assets –returns, risks, certainty, period to redeem assets
  • Liabilities – potential future outflows from what you have provided
  • Expected profits and volatility of profits to support the liquidity

McGing’s approach:

We ask you for all of the collated data and information, your internal best estimate of your cashflows and items impacting your liquidity. You know your business best and would be able to give us a very comprehensive data set. We then lean into your detailed data set. We actuaries love to see tangible data sets and then use that as a springboard into discussions!

Any liquidity policies or thoughts that you have

  • Your risk tolerance
  • any informal or formal liquidity management strategy that you have
  • how you will identify, monitor and control liquidity risk
  • your views on funding
  • Contingency plans

McGing’s approach: We collate any thoughts, policies, procedures (whether formal or informal) that you have to give an outline of what liquidity looks like for your organisation.

First principles of liquidity analysis:

  1. Robust framework to manage liquidity risk
  2. Sufficient liquidity to meet obligations as they fall due
  3. Determine level of assets to survive liquidity stress
  4. Your business activities over the next 3 years are funded with stable sources of funding on an ongoing basis
  5. Examine your concerns about current and future liquidity position, contingency planning in severe liquidity stress scenario

McGing’s approach: McGing works with you to develop the liquidity analysis to meet the first principles outlined above.