How do you determine the appropriate size of a corporate liquidity buffer?
A core Corporate Treasury interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
The liquidity buffer should cover potential cash outflows under stress. I start with a base of upcoming debt maturities, committed capex, and expected operating cash needs. Then I add a contingency for adverse scenarios: a 10-20% revenue drop, delayed receivables, or a credit market freeze. I also consider the undrawn RCF as a backstop, but cash is more reliable. A common benchmark is 2-3 months of operating expenses plus near-term debt service. The final size balances cost of carry against the risk of illiquidity.
WHAT INTERVIEWERS LISTEN FOR
- ✓Includes debt maturities, capex, operating needs
- ✓Adds stress scenario analysis
- ✓Considers RCF as complement, not full substitute
COMMON MISTAKES
- ✗Only uses one metric like '3 months of revenue'
- ✗Ignores quality of cash (e.g., trapped cash)
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