Factors that Impact Liquidity Risk
1. Market Conditions: Market conditions can impact the liquidity risk of a company. Market conditions may include changes in interest rates, credit availability, and investor sentiment. An increase in the interest rates or tight credit markets may reduce access to funding and increase the liquidity risk. Companies with high debt levels or weak credit profiles suffer more in these critical market situations.
2. Lack of Funding: When an organization fails to obtain finance at competitive rates, it might increase its liquidity risk. The funding structure of a company, lines of credit, or other financing sources, affects liquidity risk.
3. Capital Expenditures: Unplanned capital structure affects the liquidity risk of a company. It can be increased if there is a lack of an asset management system, especially in heavily capital-intensive organizations. These businesses often have a high fixed to variable costs ratio which may increase the liquidity risk.
4. Management Practices: Governance, risk management, and liquidity management policies implemented by companies influence their liquidity risk. Effective liquidity risk management, stress testing, and contingency planning help mitigate liquidity risk and enhance the working.