Meaning and transaction use
The Basel Committee defines funding liquidity risk as the risk that a firm cannot meet expected and unexpected cash-flow and collateral needs efficiently without affecting operations or financial condition. [S1]
The Basel liquidity framework uses forward cash-flow projections, sources-and-uses analysis, alternative scenarios and cumulative liquidity gaps. Its regulatory requirements apply to banks; these analytical concepts can inform a corporate assessment when adapted to the entity. [S1]
IAS 1 requires management to assess going concern and consider available information about the future; accounting conclusions and disclosures require the applicable framework and professional judgment. [S2]
Worked example
Illustrative four-week sources-and-uses test only. Assume unrestricted opening cash of 5.0 million, a verified drawable facility of 10.0 million, forecast cash receipts of 18.0 million, operating outflows of 20.0 million, debt service of 6.0 million and required minimum operating cash of 3.0 million. In a downside case, receipts fall by 25.0% and only 8.0 million of the facility remains drawable.
Scroll the table horizontally to view all columns.
| Measure | Calculation | Result |
|---|---|---|
| Base available sources | 5.0 + 10.0 + 18.0 | 33.0m |
| Base uses including minimum cash | 20.0 + 6.0 + 3.0 | 29.0m |
| Base liquidity headroom | 33.0 - 29.0 | 4.0m |
| Downside receipts | 18.0 x (1 - 25.0%) | 13.5m |
| Downside available sources | 5.0 + 8.0 + 13.5 | 26.5m |
| Downside liquidity gap | 26.5 - 29.0 | -2.5m |
| Required additional liquidity | 29.0 - 26.5 | 2.5m |
The illustrative base case has 4.0 million of headroom, while the downside case has a 2.5 million shortfall. The company would need a verified action with sufficient amount and timing before relying on the downside case as funded.
Proposed transaction review process
Set the perimeter and horizon
Define entities, currencies, bank accounts, restricted cash, forecast granularity and decision dates.
Verify sources and uses
Reconcile cash, receipts, payment obligations, facilities, covenants, security, draw conditions and contingencies.
Run base and stress cases
Test collection delays, revenue decline, margin pressure, funding withdrawal, collateral calls and one-off requirements.
Build the action plan
Assign owners, amounts, timing, approvals and trigger points for funding, cost, working-capital and stakeholder actions.
Evidence checklist
Cash and facilities
Bank statements, blocked or restricted cash, facility agreements, utilisation, covenants and draw notices.
Cash-flow forecast
Customer receipts, payroll, suppliers, tax, capital expenditure and reconciled opening balances.
Debt and contingencies
Maturity schedule, interest, collateral, guarantees, leases, litigation and off-balance-sheet commitments.
Mitigating actions
Approved waivers, committed funding, executable asset sales, documented cost actions and responsible owners.
Decision framework
| Situation | Proposed action |
|---|---|
| A facility has unverified draw conditions | Exclude it from available liquidity until the conditions and timing are evidenced. |
| A shortfall occurs before period end | Manage to the earliest daily or weekly trough rather than the later closing balance. |
| A mitigation depends on counterparty consent | Treat it as contingent and maintain an alternative action until approval is documented. |
| Headroom is narrow under stress | Set escalation triggers and increase monitoring frequency before the threshold is reached. |
Common errors to check
- Counting restricted cash or uncommitted facilities as immediately available.
- Netting inflows and outflows in a way that hides an intraperiod cash trough.
- Assuming refinancing, waiver or asset-sale proceeds without verified conditions and timing.
- Using one optimistic scenario without covenant, contingency and downside tests.
Identify the earliest liquidity gap
Bring the cash forecast, bank evidence, debt schedule, facility terms, covenants and proposed mitigations to a liquidity review. Verify each source, locate the earliest stressed cash trough and assign actions before funding is required.
Discuss the transactionPrimary references and editorial scope
- Basel Committee, Liquidity risk management and supervision
Funding-liquidity definition, cash-flow projection, stress scenarios and liquidity-gap analysis for banks. Reference checked 17 September 2026. - IFRS Foundation, IAS 1 Presentation of Financial Statements
Going-concern assessment and consideration of future information. Reference checked 17 September 2026.
General restructuring education. Figures are hypothetical. The Basel source is bank-specific; corporate use requires adaptation. Going-concern, insolvency, disclosure and director-duty conclusions depend on the entity, jurisdiction, accounting framework and current professional advice.
General business information. Obtain advice appropriate to the legal, tax, accounting and financing facts. No offer, lender commitment or transaction outcome is represented. All worked examples use expressly assumed figures. Editorial draft date: 17 September 2026.
