Liquidity Management, Part One: Why Is It Important?
(Originally published as an article within ECCU’s former e-publication, Ministry Banking Today.)
“Do we have enough cash to cover expenses?” The question alone elicits anxiety, especially for donor-based ministries with constantly fluctuating cash flow. So, with eyes squeezed tight and prayers whispered, ministries may ignore the practice of liquidity management and hope for the best.
Rather than crossing our fingers, Ministry Banking Today wants to help uncover the mysteries of managing liquidity. In fact, we feel this topic is so important that two issues will have articles devoted to it. This article provides introductory information; next month we’ll explore the details and solutions to liquidity management.
Liquidity management is the practice of managing finances in a way that allows ministries to meet their financial obligations and accomplish their mission. Without adequate financial resources, ministries can be distracted from mission accomplishment to cope with financial pressures. No wonder it’s so important.
Careful liquidity management is often overlooked due to a false sense of security. What appear to be large cash balances can lead ministries to believe they have sufficient cash, forgetting that unexpected expenses, the loss of a key donor, or an unanticipated program opportunity will quickly expose inadequate resources.
The need for liquidity arises from the fact that daily cash inflows seldom equal expenses. For example, ministries predictably experience a dip in donations during the summer, right when expenses are usually the highest. And impacts on cash flow often happen without warning, causing financial pressures.
Ministries with inadequate liquidity are likely to delay payments to vendors or lenders, tarnishing their reputation and costing additional funds and time to manage the situation.
In more serious cases, inadequate liquidity can cause salary delays, layoffs, or suspended mission programs.
Fortunately, there are ways to prepare for the unexpected and properly manage liquidity. Stay tuned for next month’s article on determining the appropriate level of liquidity for your ministry.
For Liquidity Management, Part Two: How Much is Enough follow this link.