Monday, July 7, 2025
  • Home
  • National
  • International
  • Movies
  • Technology
  • Business
  • Fitness
  • Lifestyle
  • Punjab
  • Contact us
No Result
View All Result
No Result
View All Result
Home Business

Your Money: Why liquidity is paramount for a business

by author
September 26, 2021
in Business
0
Your Money: Why liquidity is paramount for a business
0
SHARES
31
VIEWS
Share on FacebookShare on Twitter


Companies and corporate analysts use certain key ratios to gauge liquidity.Companies and corporate analysts use certain key ratios to gauge liquidity.

By Sunil K Parameswaran

Related posts

EXCLUSIVE – Crypto giant Binance controlled ‘independent’ US affiliate’s bank accounts

EXCLUSIVE – Crypto giant Binance controlled ‘independent’ US affiliate’s bank accounts

June 5, 2023
Why investing just to save tax may be bad for you

Why investing just to save tax may be bad for you

June 5, 2023

An asset is said to be liquid if it can be bought and sold easily. In other words, if the asset trades in a liquid market, buyers can easily locate sellers and vice versa. Otherwise, if buyers significantly outnumber sellers, traders will have to hike up their prices in order to transact. On the contrary, if the market is dominated by sellers, then prices will have to be brought down before a transaction takes place.

One measure of liquidity is the bid-ask spread if the market for the asset is made by dealers. Dealers will typically give a two-way quote, that is, a price for buying, and a higher price for selling. The difference between the two is called the spread. If transactions are few and far between, the spreads will be high. Else, if the market is very liquid, then the spreads will be low.

Liquidity issues
Banks are also dealers. Their product is money. So, like other dealers, they too have a spread called the Net Interest Margin, which is the difference between their lending rate and their borrowing rate. If liquidity is tight the margin will be high. Else, if they are flush with funds, the margin will be low.

The central bank of a country has various tools for influencing liquidity. These include open market operations, which entails the purchase and sale of government securities, and adjusting the reserve ratios applicable for commercial banks. If the central bank buys securities, it injects money into the system and boosts liquidity. On the other hand, if it wants to reduce liquidity it can sell securities. In the case of reserves, if the central bank wants to reduce liquidity it will increase the reserve ratio. However, it wants to make more funds available to the banking sector for lending, it will reduce the reserve ratio.

Companies and corporate analysts use certain key ratios to gauge liquidity. The first is called the current ratio. It is the ratio of current assets to current liabilities. Current assets are referred to as working capital and current assets minus current liabilities as net working capital. Thus, if the current ratio is greater than one, then the net working capital will be positive, else it will be negative. If the net working capital is negative, it means that to an extent, long-term assets are being funded with short-term liabilities.

Short-term liabilities
This can be a problem because short term liabilities have to be repaid quickly whereas long-term assets can be hard to sell. A more stringent measure of liquidity is the quick ratio or the acid-test ratio. It is computed by subtracting inventories from the current assets, and then dividing by the current liabilities. Thus, the quick ratio will be lower than the current ratio. The rationale for subtracting inventories is that of all the current assets on the balance sheet, they are the hardest to convert to cash.

Liquidity is paramount for a business. In the long-run a business that is not profitable will collapse. In the short-run a business without adequate liquidity is likely to fold up. Profit and cash are not the same. Thus, a business may be very profitable, but have a cash crunch which can bring its activities to a grinding halt.

The writer is CEO, Tarheel Consultancy Services

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.





Source link

Previous Post

Pandemic hits car workshops revenue stream, Auto News, ET Auto

Next Post

Mamata Banerjee failed to stop post-poll violence in Bengal, has no right to attend peace meet in Rome: Suvendu Adhikari | India News

Related Posts

EXCLUSIVE – Crypto giant Binance controlled ‘independent’ US affiliate’s bank accounts
Business

EXCLUSIVE – Crypto giant Binance controlled ‘independent’ US affiliate’s bank accounts

June 5, 2023
Why investing just to save tax may be bad for you
Business

Why investing just to save tax may be bad for you

June 5, 2023
Share Market outlook today: Nifty, Bank Nifty may to gain on positive global cues; check support, resistance
Business

Share Market outlook today: Nifty, Bank Nifty may to gain on positive global cues; check support, resistance

June 5, 2023
Startup group of G20 calls for $1-trillion commitment
Business

Startup group of G20 calls for $1-trillion commitment

June 5, 2023
DHARAKSHA: Converting rice straw stubble to sustainable packaging material
Business

DHARAKSHA: Converting rice straw stubble to sustainable packaging material

June 4, 2023
Amrita Hospital, Kochi opens two new research centres; announces Rs 65 Crore for charitable care
Business

Amrita Hospital, Kochi opens two new research centres; announces Rs 65 Crore for charitable care

June 4, 2023
Next Post
Mamata Banerjee failed to stop post-poll violence in Bengal, has no right to attend peace meet in Rome: Suvendu Adhikari | India News

Mamata Banerjee failed to stop post-poll violence in Bengal, has no right to attend peace meet in Rome: Suvendu Adhikari | India News

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

RECOMMENDED NEWS

Omicron to dominate Europe soon, booster dose important defence: WHO | World News

Omicron to dominate Europe soon, booster dose important defence: WHO | World News

4 years ago
Exclusive: Pakistan Eyes Kartarpur Corridor Expansion Ahead Of Agreement Renewal With India | India News

Exclusive: Pakistan Eyes Kartarpur Corridor Expansion Ahead Of Agreement Renewal With India | India News

9 months ago
Abu Dhabi T10 2021: Fixtures, venue, full squads and other details | Cricket News

Abu Dhabi T10 2021: Fixtures, venue, full squads and other details | Cricket News

4 years ago
Rising input costs to take shine off Moradabad brass units

Rising input costs to take shine off Moradabad brass units

3 years ago

BROWSE BY CATEGORIES

  • Animals
  • Architecture
  • Automobiles
  • Business
  • Culture
  • Fitness
  • International
  • Lifestyle
  • Movies
  • National
  • Sports
  • Technology
  • Travel

BROWSE BY TOPICS

Architecture culture Fitness indian architecture indian culture indian culture and heritage indian news lifestyle national news Technology technology news Travel travelling

About Us

Awaj Ludhiana Ki

Address

2667/3, Kishore Nagar, Tajpur & Jail Road, Ludhiana – 141008

Recent News

  • UK F-35B Jet Under Repair In Kerala, UK Grateful To India For Support
  • Why Argentina Collapsed 7 Times? PM Modi’s Visit Revives The Story Of A Fallen Nation That Was Richer Than Europe | World News
  • Indians In UAE Gave Up Citizenship, Paid Big For ‘Second Passport’ – Now The West Is Locking Them Out | World News
  • Aamir Khan to be honoured at IFFM 2025 with retrospective and Sitaare Zameen Par spotlight : Bollywood News
  • Fake Images To Fragile Fleet: Pakistani Navy Stares At Unprecedented Crisis As India Marches Ahead | World News

Category

  • Animals
  • Architecture
  • Automobiles
  • Business
  • Culture
  • Fitness
  • International
  • Lifestyle
  • Movies
  • National
  • Sports
  • Technology
  • Travel

Search

No Result
View All Result

Email

[email protected]

  • About
  • Advertise
  • Careers

Copyright © 2019 Awaj Ludhiana Ki or it's affiliates | Website by Awaj Ludhiana Ki Team

No Result
View All Result
  • Home
  • Contact us
  • Animals
  • Architecture
  • Automobiles
  • Business
  • Culture
  • Fashion
  • Fitness
  • Food
  • International
  • Lifestyle
  • Movies
  • National
  • Sports
  • Technology
  • Travel
  • Punjab

Copyright © 2019 Awaj Ludhiana Ki or it's affiliates | Website by Awaj Ludhiana Ki Team

Login to your account below

Forgotten Password?

Fill the forms bellow to register

All fields are required. Log In

Retrieve your password

Please enter your username or email address to reset your password.

Log In