Liquidity is a measure of the extent to which a person or organization has cash to meet immediate and short-term obligations, or assets that can be quickly converted to generate cash. In accounting terms it is the ability of current assets to meet current liabilities. And in investing terms it is the ability to quickly convert an investment portfolio to cash with little or no loss in value.
Liquidity risk is the risk that a company or bank may be unable to meet short term financial demands and business obligations. This usually occurs due to the inability to convert a security, hard assets to cash or timely collect its Account Receivables.
FACTORS INDICATING LIQUIDITY PROBLEM
- Difficulties in paying bills/ suppliers etc.: When company facing problem in paying to suppliers/ employees and other bills.
- Current ratio: When company has a lower current ratio- meaning current assets/current liabilities are almost same.
- Cash account ratio: When cash ratio is less than 1
- Profitability: When a company is not profitable, it loses money over time, which diminishes cash reserves and liquidity. If a company is not profitable after its initial start-up phase, it indicates that the company may face liquidity problems in the future.
EFFECTS OF LIQUIDITY PROBLEM
Almost all the companies in the UAE are facing some of the below problems- as in current scenario, most of the companies facing difficulties in finding source of finance for their business.
- Difficulties in collecting account receivables.
- Banks are either reluctant to extend financing facilities, or reduced the existing facilities by at-least 50% due to poor profitability and poor liquidity
- Poor growth in sales/revenue.
- Inability to manage cost and operating expenses
- Inadequate cash resources to invest in order to improve growth
HOW MIM CAN HELP
- Analyze and assess company financial to identify the financial requirements.
- To enhance the company financial potential so that it can pay its obligations on time.
- To find a source for company so that it can inject more capital.
- Negotiation with Banks to either ease the existing terms or get a new financial assistance.