Liquidity Cushion

AAA

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.

INVESTOPEDIA EXPLAINS '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."

RELATED TERMS
  1. Money Market

    A segment of the financial market in which financial instruments ...
  2. Cash

    Legal tender or coins that can be used in exchange goods, debt, ...
  3. Risk-Based Capital Requirement

    A rule that establishes minimum required liquid reserves for ...
  4. Liquidity Risk

    The risk stemming from the lack of marketability of an investment ...
  5. Liquidity

    1. The degree to which an asset or security can be bought or ...
  6. Cash Position

    The amount of cash that a company, investment fund or bank has ...
RELATED FAQS
  1. Where do companies keep their cash?

    If you have ever looked over a company's balance sheet, you have no doubt noticed the first account under the current asset ... Read Full Answer >>
  2. What are some examples of a deferred tax liability?

    In the United States, laws allow companies to maintain two separate sets of books for financial and tax purposes. Because ... Read Full Answer >>
  3. How can the first-in, first-out (FIFO) method be used to minimize taxes?

    The first-in, first-out (FIFO) inventory cost method can be used to minimize taxes during periods of rising prices, since ... Read Full Answer >>
  4. Why is the use of contra accounts so important for maintaining ledgers?

    Contra accounts have been used in financial accounting to verify the balance of another corresponding account since Renaissance ... Read Full Answer >>
  5. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  6. How are prepaid expenses recorded on an income statement?

    Prepaid expenses are not recorded on an income statement. When the prepaid expense becomes due, the expense is recognized ... Read Full Answer >>
Related Articles
  1. Personal Finance

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  2. Investing Basics

    The Working Capital Position

    Learn how to correctly analyze a company's liquidity and beat the average investor.
  3. Investing Basics

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  4. Options & Futures

    Basic Investment Objectives

    You might know about different asset types, but do you know how each type contributes to a particular goal?
  5. Economics

    What is a Share Premium Account?

    The share premium account is an equity account found on a company’s balance sheet.
  6. Investing

    What is Comprehensive Income?

    Comprehensive income is a part of the owners’ equity section of the balance sheet.
  7. Economics

    What Does Debit Mean?

    Debit is an accounting term used to refer to the left side of an accounting journal entry. Each debit must be offset by an equal credit entry.
  8. Economics

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  9. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  10. Investing

    Apple or Google: Which is the Better Bet?

    Apple and Google have made many investors rich since the turn of the century. Which is more appealing going forward?

You May Also Like

Hot Definitions
  1. Fracking

    A slang term for hydraulic fracturing. Fracking refers to the procedure of creating fractures in rocks and rock formations ...
  2. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  3. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  4. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
Trading Center