Business Studies – 5.5.2 Liquidity | e-Consult
5.5.2 Liquidity (1 questions)
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Liquid assets are assets that can be easily converted into cash with minimal loss of value. Illiquid assets are assets that are difficult to convert into cash quickly without a significant loss in value.
Examples of liquid assets:
- Cash and bank balances: These are readily available for immediate use.
- Short-term deposits: These can be withdrawn quickly, usually within a short notice period.
Examples of illiquid assets:
- Property, plant, and equipment (PP&E): Selling these can take time and may require price reductions.
- Long-term investments: These are often difficult to sell quickly and may not yield immediate returns.
Effective liquidity management is crucial for a business for several reasons:
- Meeting short-term obligations: Ensures the business can pay its bills, such as suppliers, salaries, and loan repayments.
- Avoiding financial distress: Sufficient liquidity reduces the risk of insolvency and potential business failure.
- Taking advantage of opportunities: Having readily available cash allows the business to seize unexpected opportunities, such as discounted purchases or new investment possibilities.
- Maintaining stakeholder confidence: Demonstrates financial stability to lenders, investors, and customers.