Question

Discuss how managing liquidity fits into your financial plan. What is the liquidity trade-off?

Answer 1

Managing liquidity takes one of two types, depending on liquidity description. Another form of liquidity refers to being able to sell an asset at its current price, such as a stock or bond. The other liquidity term refers to large companies, such as financial institutions. Banks are also measured on their liquidity, or their ability to meet cash and collateral obligations without major losses. In any case, liquidity management defines investor or manager attempts to reduce exposure to liquidity risks.

Liquidity risk management is a major task of each financial institution, and every financial institution aims to provide and sustain on a regular basis a certain degree of liquidity. This liquidity hazard itself is incomprehensible, but it is possible to mitigate its negative impacts through a complex liquidity chance management scheme

Liquidity plays a critical part in a business' efficient functioning. The essential part of managing work capital is the day-to-day management of resources to ensure the smooth functioning of the company and to fulfill its obligations. Hence, it is very important to keep a close eye on the company's liquidity position as the company can not survive without it. But attempts to improve profitability tend to reduce the liquidity of companies, and too much exposure to liquidity tends to affect profitability. No doubt every organization tries to optimize productivity by holding liquidity.

That would require an appropriate WCM to strike a balance between the firm's two core objectives. It is important that the liquidity of the business should be properly balanced because, on the one hand, excessive liquidity indicates the accumulation of idle funds which do not make any profits for the company and, on the other hand, insufficient liquidity could harm the reputation of the company, deteriorate the credit status of the company, which could lead to forced liquidation of the assets of the company. Hence a trade-off between liquidity and productivity must be preserved.