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Why is liquidity an objective of financial management? Liquidity refers to the ability of a business to meet its short-term obligations, such as paying bills and salaries - HSC - SSCE Business Studies - Question 24 - 2018 - Paper 1
Question 24
Why is liquidity an objective of financial management? Liquidity refers to the ability of a business to meet its short-term obligations, such as paying bills and sa... show full transcript
Worked Solution & Example Answer:Why is liquidity an objective of financial management? Liquidity refers to the ability of a business to meet its short-term obligations, such as paying bills and salaries - HSC - SSCE Business Studies - Question 24 - 2018 - Paper 1
Step 1
Why is liquidity an objective of financial management?
Answer
Liquidity refers to the ability of a business to meet its short-term obligations, such as paying bills and salaries. An organization must maintain enough liquid assets to ensure smooth operations and avoid financial distress.
Liquidity is essential in financial management because it affects the overall sustainability of the business. Poor liquidity can lead to insolvency, as the firm may not be able to fulfill its immediate liabilities, which can harm its reputation and lead to loss of business.
A business must strategically manage its liquidity to balance its assets and ensure the availability of immediate cash flows for operational needs.
Step 2
How could a business improve management of its accounts receivable turnover?
Answer
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Review Credit Policies: By analyzing and adjusting credit policies, a business can reduce the amount of credit given to less reliable customers and improve its overall collection process.
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Implement Efficient Invoicing: Utilizing automated invoicing systems ensures timely billing, clear payment terms, and maintains consistent follow-up with customers, significantly boosting turnover rates.
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Offer Discounts for Early Payments: By incentivizing customers with discounts for early payments, businesses can enhance cash flow and incentivize quicker payment cycles.
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Enhance Collection Processes: Establishing a dedicated accounts receivable team or utilizing third-party collection agencies can streamline collection efforts and improve turnover rates.