Compare and contrast the use of assets and liabilities for liquidity sources.

Compare and contrast the use of assets and liabilities for liquidity sources.

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Answer:

Liquidity sources- Are the places which have liquid cash and easily accessible of liquidity. Liquidity sources are the part of liquidity management that can generate cash to meet the short term obligations of the company. Company should manage the major sources of liquidity effectively.

Primary sources of Liquidity are as following:

Cash at banks
Marketable securities
Trade credit or Line of credit
Liquidation of assets

The use of assets and liabilities for liquidity sources-

Assets- When payment is received early and inventory is sold frequently, these activities increase the liquidity in the sources. When there is delay in paying cash, cash can remain more time in the sources that can be utilized for other important work.

Liabilities- Sometimes there is drag of liquidity happens due to insufficient funds. This may be due to outdated inventory, uncollected receivables and tight credit policies. When payments are done frequently then also there is less liquidity remaining in the liquidity sources because cash is used to pay the short term obligations (payables), limit on short term line of credit etc.

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