Liquidity reserve

Definition of liquidity reserve

A liquidity reserve is held by a company in order to adequately counter the uncertainty in the development of cash flows. It can be formed in two ways:

Indirect liquidity reserve

Indirect through the careful approach of the plan values, whereby safety margins are formed in the financial plan. The deposits tend to be a little lower and / or the payouts are a little higher than expected. The disadvantage is that the informative value of the financial plan is limited as a result.

direct liquidity reserve

Direct the formation of a liquidity reserve is carried out by maintaining cash to ward off possible payment bottlenecks. You can have a reserve of solvency, assets or financing being.

Guidelines for determining the level of the liquidity reserve are obtained from empirical values. On the one hand, for security reasons, it seems advantageous to keep the highest possible liquidity reserve. On the other hand, a large liquidity reserve reduces the profitability of the capital tied up in the company. Therefore it should not be higher than absolutely necessary.

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