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Question 24 (10 marks) (a) Why is liquidity an objective of financial management? (b) How could a business improve management of its accounts receivable turnover? - HSC - SSCE Business Studies - Question 24 - 2018 - Paper 1
Question 24
Question 24 (10 marks) (a) Why is liquidity an objective of financial management? (b) How could a business improve management of its accounts receivable turnover?
Worked Solution & Example Answer:Question 24 (10 marks) (a) Why is liquidity an objective of financial management? (b) How could a business improve management of its accounts receivable turnover? - HSC - SSCE Business Studies - Question 24 - 2018 - Paper 1
Step 1
Why is liquidity an objective of financial management?
Answer
Liquidity is an essential objective of financial management as it ensures that a business can meet its short-term obligations. It reflects a company's ability to convert assets into cash quickly without significant loss in value. Maintaining liquidity is crucial for operational stability since it allows an organization to manage expenses, invest in opportunities, and avoid insolvency.
Furthermore, adequate liquidity helps in building trust with suppliers and creditors, enhancing the overall financial health of the organization. Thus, achieving a balanced liquidity position is vital for sustainable financial management.
Step 2
How could a business improve management of its accounts receivable turnover?
Answer
To enhance the management of its accounts receivable turnover, a business can implement several strategies:
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Establish Clear Credit Policies: This ensures that credit is extended only to customers with a sound credit history, reducing the risk of defaults.
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Monitor Aging Receivables: Regularly reviewing accounts receivable can help businesses identify delinquent accounts early, allowing for timely collection actions.
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Offer Discounts for Early Payment: Encouraging customers to pay early through attractive discounts can accelerate cash inflows.
By adopting these practices, businesses can significantly improve their accounts receivable turnover, leading to better cash flow management.