Corporate Liquidity Components of Liquidity Meaning of Illiquidity Measurements of Liquidity Amount of Liquidity maintaining by the

firm Cost of Liquidity Forms of Liquidity

Suitable definition is not given by any author. Shift-ability Theory: Liquidity depends on:

Internally on fungibilty of assets, Externally on market efficiency

Ability to convert business investment into cash. Relationship of Current Asset with Current

Liabilities. Business' ability to meet its cash obligations.

Cont…

According to Finance Manager: Continuous flow of cash to meet the cash obligation.

According to Operation Manager: Availability of inventories at the right time and at the right place.

According to Marketing Manager: Availability of finished goods in the distribution channel.

Support the liquidity need of the firm Making some money to support the treasury

functions. To keep the operations of business ongoing by

maintaining the liquidity To check out the short term and long term

performance of the business firm.

Amount Time Cost

Liquidity Crises Shortage of Cash to meet firm’s cash obligations Stopped Production Process Dry Distribution Channel Insufficient Inventory Irregular Flow of Cash

Dearth of Raw Production Mat. in market Stopped

Brink Liquidation

Cash Inflow Sales Distribution stopped stopped Channel

(Dry up)

Cash

Level of Solvency of the firm Financial flexibility of the firm Measures of Liquidity:

1) Current Ratio & Quick Ratio:

Current Ratio = Current Assets

Current Liabilities

Quick Ratio = Quick Assets

Current Liabilities

Cont….

2) Turnover Ratios:

a)Accounts Receivable Turnover Ratio

Accounts Receivable = Gross Sale

Turnover Ratio Trade Receivable

b)Finished Goods Inventory Turnover Ratio

Finished Goods Inventory = Cost of Good Sold

Turnover Ratio Finished Goods Inventory

3) Net Working Capital Ratio:

Net Working = Net Working Capital

Capital Ratio Gross Current Asset

4) Sales Cash Conversion Cycle

5) Uncertainty Factor (Lambda)

6) Window Dressing

SHORT TERM

1. High Sales Cash Conversion Cycle.

2. High Current & Quick Ratio.

3. Low Finished Goods Inventory Turnover Ratio.

4. Low Accounts Receivable Turnover Ratio.

LONG TERM

1. Low Sales Cash Conversion Cycle.

2. Low Current & Quick Ratios.

3. High Finished Goods Inventory Turnover Ratio.

4. High Accounts Receivable Turnover Ratio.

Decision to have a certain amount of liquidity Decision should be based on trade-off between:

a) Expected cost of maintaining insufficient liquidity, and

b) The cost of carrying liquid sources or assets.

Cost Of Maintaining Liquidity

Cost Of Maintaining Liquidity = CL Expected Cost Of Liquidity

Expected Cost Of Illiquidity = pKL

Total Expected Liquidity CostTotal Expected Liquidity cost = CL + pKL

Depends upon the risk profile of enterprise

a) Highly risk- averse: Cash & bank balance

b) Highly risk- oriented enterprise: Market security

Primary liquidity Secondary liquidity Primary purpose:

Working Capital Management

by: Hrishikes Bhattacharya Working Capital Management

by: V.K. Bhalla www.google.com www.soople.com www.wikipedia.com