A 1980s CFO taught me a simple mantra, “Liquidity, Liquidity, Liquidity.” For him, a firm could not have too much of it. The rationale: a liquidity crisis, the inability to meet daily cash requirements, could put you out of business faster than any other risk.

While in the intervening 25 years new risks have emerged, his lesson continues to be on the money. Insufficient cash flow results in bankruptcy. 

Examples abound

In the corporate world, Lehman Brothers, Drexel Burnham Lambert, and PennCentral are examples of firms that collapsed because of their inability to re-finance their overnight obligations. During the recent financial crisis, Harvard University had trouble meeting its cash obligations despite its multi-billion dollar endowment and Boston-area real estate.   

Sovereign nations face liquidity problems too. Current events in Greece and other Eurozone countries vividly demonstrate the challenges of dealing with a nervous bond market. Experience shows that defaulting will prolong the pain. Access to the capital markets may be closed for years. Ten years ago, Argentina defaulted; that country still cannot issue sovereign debt.

Individuals are not immune to this problem either. While the details are slightly different, the result of a liquidity crisis is the same, bankruptcy. Not a happy result for any entity – whether a country, a corporation, a not-for-profit, or an individual.      

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