A firm is required to maintain a balance between silver-tonguedity and profitability while conducting its sidereal day to day ope rations. Investments in trustworthy assets are inevitable to ensure address of goods or services to the ultimate customers. A proper worry of the same could result in the desired impact on either profitability or liquidity.
Liquidity is a gear up to ensure that firms are able to meet its short-term obligations.1 The liquidity home in a company is measured based on the current ratio and the quick ratio. The current ratio establishes the relationship between current assets and current liabilities. Normally, a high current ratio is considered to be an indicator of the firms ability to promptly meet its short term liabilities. The quick ratio establishes a relationship between quick or liquid assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value.1
Consequences of low liquidity
a) A company that cannot pay its creditors on time and continues not to honor its obligations to the suppliers of credit, services and goods could result in losses on account of non-availability of supplies and lead to possible unhealthiness or insolvency.
2 Also, the inability to meet the short term liabilities could take the companys operations and in many cases it may affect its report card as well.2 Lack of cash or liquid assets on hand may force a company to fall back the incentives given by the suppliers of credit, services, and goods as well. Loss of such incentives may result in higher cost of goods which in childs play affects the profitability of the business.
b) Every stakeholder has interest in the liquidity position of a company. Suppliers of goods will check the liquidity of the company ahead selling goods on credit. Employees should also be concerned close to the companys liquidity to know whether the company can meet its...If you wish to get a full essay, order it on our website: Ordercustompaper.com
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