Question

It is estimated that around 60% of small businesses fail because of poor management of working capital.

(a) Analyse two problems for small businesses of having insufficient liquidity.
Word Limit: 300 words

Answer 1

Two problems for small businesses of having insufficient liquidity

LIQUIDITY : Liquidity is a form of asset that can be easily converted into cash or quickly trade it on the open market, without affecting its value. Making profit is the main objective of every business, but along with profit creation, maintaining a good ratio of liquidity is important for whole transactions of the business. Lack of profit can kill the business, but lack of liquidity can destroy the whole organization functions of the business. Sufficient liquidity ratio is necessary for both small and large business inorder to maintain proper managerial and finance functioning. Lots of problems will arise when a business fails to maintain sufficient liquidity. Some of the problems are discussed below :

● FINANCE DEVELOPMENT PROBLEMS : Liquidity is highly necessary for any enterprises to meet day to day expenses. Shortage of liquidity creates many issues such as slow payments on suppliers account, failure in paying timely wages to the employees, slowdown creating market expansion plans, etc. These all will affect overall functioning of the business and adversely affect on the existence of small businesses.

● DIFFICULTY IN PAYING BILLS : It is advised to pay bills and loans in timely basis, because it is a clear sign that the company has liquidity problems. Failure or late bill payment results, imposition of fees or penalties for non payment and that make harder for the company to borrow in the future.