Liquidity Budget
A liquidity budget is a plan that estimates future cash needs and sets minimum liquid resources to meet obligations under normal and stress scenarios.
Allocator relevance: Prevents forced selling and helps manage pacing, capital calls, and spending requirements with discipline.
Expanded Definition
Liquidity budgets forecast expected outflows (spending, operations, capital calls, debt service, redemptions) and inflows (distributions, income, maturities). They also model stress conditions where distributions slow, capital calls accelerate, and public assets draw down simultaneously. In allocator portfolios with large private allocations, liquidity budgeting is a core control.
How It Works in Practice
Teams build rolling cash flow models, set liquidity buffers, and update assumptions as market conditions change. They integrate pacing models and maintain liquid sleeves designed to absorb shocks.
Decision Authority and Governance
Governance defines liquidity thresholds, who can approve increasing illiquid exposure, and what triggers rebalancing or de-risking. Good governance prevents “optimistic cash flow assumptions.”
Common Misconceptions
- Liquidity budgeting is only needed for institutions.
- Distributions will fund future capital calls reliably.
- Liquidity buffers are wasted cash.
Key Takeaways
- Liquidity budgets are risk controls, not conservatism theater.
- Stress scenarios matter most.
- Update cadence and governance determine usefulness.