Question

Liquidity: What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.

For the business industry corporation and relate that information to the concept of liquidity: think about the ease or difficulty involved in raising funds for your prospective business!

250 Words

Answer 1

Liquidity will measure the overall cash positions and cash equivalent positions because these are quick realisations without the fall in the value of the Asset and this will help the company to have a better flexibility in operation due to cash in hands.

Trade off a firm faces between low liquidity and high liquidity will be because there are many companies who want to deploy their cash in order to exploit the current market scenario, and it can lead the company into various kinds of risk, if there is a freeze in the economy and there is a negative economic cycles. recoveries will be highly impacted for these companies and the money will be getting stuck in the long-term projects and they do not have the money to facilitate the short-term growth because they do not have the liquidity in the hands.

So, trade off would be the growth related to deployment of the cash and the risk of the credit freeze and bankruptcy.

liquidity is very important for starting a business also because it will help in order to manage the business in a better way by investing into better projects, which will have quick realisation so that the overall liquidity of the company shall not be impacted.