MONITORING – LIQUIDITY

Although, profitability and selection of goods investment are the keys to the prosperity of the firm in the long run, yet it is the liquidity which ensures the short term survival of the firm.  Sufficient liquidity can be obtained by efficient management of different elements of working capital.  If a firm faces liquidity problems, then it must be realized that this liquidity problem arises from lack of finance.  The liquidity problem can be overcome in two ways (i) to raise additional funds from different sources.  But this may not always be possible for the firm, and (ii) the following steps may be taken by the firm to ease the liquidity problem:

a)    Reduce the safety stock, resulting in reduction of order size.  This reduction in order size however, will have many repercussions such as more frequent and costly orders, loss of quantity discount, probability of stock-out etc., and therefore, must be decided very carefully.

b)    Another way of improving the liquidity may be to delay the payments to the creditors but this is not possible without impairing the goodwill of the firm.

c)    Liquidity can also be improved by concentrating more on collections of receivables.  More effective control system should be introduced and the customers may be offered incentive for prompt payments.  An improvement in collections definitely improves liquidity but it has a cost in terms of a possibility of a loss of customer.

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