 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
Cash Dearth of Raw Production
Mat. in market Stopped

Brink
Liquidation

Cash Inflow Sales Distribution

stopped stopped Channel
(Dry up)
 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 LONG TERM
1. High Sales Cash Conversion 1. Low Sales Cash
Cycle. Conversion Cycle.
2. High Current & Quick
Ratio.
2. Low Current & Quick
Ratios.
3. Low Finished Goods
Inventory Turnover Ratio. 3. High Finished Goods
4. Low Accounts Receivable Inventory Turnover Ratio.
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 Cost
Total 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

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