The liquidity risk that an entity is exposed to over the short run. It represents the risk arising from a firm’s inability to generate sufficient cash to cater for operating working capital needs and to service debts that mature presently or in the near future. Short term liquidity problems usually arise from untimed or mistimed cash inflows and/ or outflows and high degree of long-term leverage that impacts the servicing ability of the firm.

Short-term liquidity can be managed using an array of measures such as financial ratios (financial statement ratios):

• Current ratio: the amount of cash available to a firm, in addition to other current assets, all related to obligations coming due.
• Quick ratio (acid-test ratio): a current ratio that includes only those current assets that can be converted quickly into cash (cash, marketable securities, and receivables).
• Operating cash flow to current liabilities: the amount of cash from operations that is left after funding working capital needs.
• Working capital activity ratios: measures of rate of activity that help identify the cash-generating ability of operations and short-term liquidity of a firm. These measures include accounts receivable turnover, inventory turnover, and accounts payable turnover.
• Revenues to cash ratio: the net effect of a firm activities (operating, investing, and financing) on cash and management’s judgment in relation to the optimal level of cash.
• Days revenue held in cash: the number of days sales achieved and maintained by a firm as available/ ready cash (cash on hand).

For banking institutions, liquidity measures, such as LCR, are used. The LCR aims to strengthen banks’ short-term liquidity risk profile by maintaining an adequate level of high-quality liquid assets (HQLA). The liquidity coverage ratio (LCR) is calculated by dividing a bank’s most liquid assets by its total net cash flows (outflows), over a 30-day stress period. It is given by the following formula:

LCR= stock of HQLA ÷ net outflows

Where: LCR ≥ 100%