Liquidity Cushion


DEFINITION of 'Liquidity Cushion'

A reserve fund for a company or individual made up of highly liquid investments. A liquidity cushion relates to a business or individual holding an ample amount of cash, or other highly liquid assets, in relation to debt, so that a short-term liquidity crunch or other unexpected event will not lead to potentially disastrous consequences.

BREAKING DOWN 'Liquidity Cushion'

By maintaining cash reserves in money market instruments, unexpected demands on cash don't require the immediate sale of other less liquid securities, which in most cases would not be in the business's or individual's best interest to sell in order to raise cash. For all intents and purposes, liquidity cushion can also be known as a "rainy day fund."

  1. Cash

    Legal tender or coins that can be used to exchange goods, debt ...
  2. Liquidity

    The degree to which an asset or security can be quickly bought ...
  3. Risk-Based Capital Requirement

    A rule that establishes minimum required liquid reserves for ...
  4. Money Market

    A segment of the financial market in which financial instruments ...
  5. Liquidity Risk

    The risk stemming from the lack of marketability of an investment ...
  6. Cash Position

    The amount of cash that a company, investment fund or bank has ...
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  2. Can working capital be depreciated?

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  3. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  4. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>
  5. What are working capital costs?

    Working capital costs (WCC) refer to the costs of maintaining daily operations at an organization. These costs take into ... Read Full Answer >>
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