This lesson covers the management of liquidity and credit risk, two fundamental areas of treasury responsibility.

4.1. Liquidity Risk Management

Liquidity risk is the risk that the organisation will be unable to meet its short-term financial obligations. The CTP exam defines maintaining corporate liquidity as a core responsibility of the treasury function . Key elements of liquidity management include:

• Cash Flow Forecasting: Projecting future cash inflows and outflows to anticipate funding needs .

• Maintaining Committed Facilities: Securing lines of credit that provide a guaranteed source of funding in times of stress.

• Liquidity Monitoring Tools and KPIs: Using metrics such as the cash conversion cycle to track and manage liquidity .

4.2. Credit Risk Management

Credit risk is the risk of loss from a counterparty failing to meet its obligations. This includes exposure to banks, customers, and other financial counterparties. The ACT and CTP curricula both emphasize the management of counterparty risk . Key aspects include:

• Counterparty Credit Limits: Establishing and monitoring limits on exposure to any single counterparty. This is part of the “credit approval policy” .

• Credit Ratings: Using credit ratings to assess the financial health of counterparties.

• Diversification: Spreading exposure across multiple counterparties to avoid concentration risk.

4.3. Operational Risk

Operational risk is the risk of loss from failed internal processes, people, systems, or external events. According to the ACT, examples of operational risk include “system failures and fraudulent activity” . Effective internal controls and governance are essential for mitigating this risk . The audit committee is typically responsible for overseeing the internal control framework .