Why is liquidity important?
Many companies fail to take in to account the concept of liquidity. That is why they have to face many financial plan failures in critical times. Lack of understanding of the concept may cause many problems financially. People usually lose their money that they required for their short term needs, due to improper investing.
The most liquid asset is cash, as you can buy anything by it. Stocks that are being traded are considered as liquid because you can easily convert them into cash. This is because there is always a new investor that may be willing to purchase your shares. Whereas many other assets cannot be easily transform into cash. Private company’s debts and shares are some other investment assets that are usually not liquid. It is impossible to sell these kind of assets without facing great loss of money during economics crisis.
There are two things to consider for liquidity ratio. The first and foremost is that it is a good concept for the business world. Despite the fact that it is very important for those financial banks, which are influenced by liquidity to cover customer’s expenses. It is also significant for every kind of business.
Every company has many expenses that are used to run the business. Some of them are just for a few days while others are for longer term. Apart from critical situations, every business should have at least minimum amount of liquidity in order to run the business smoothly.
While considering that cash is important, for instance if you are having all your investments in bills then you can sell them in a few hours. While similar things like homes will require a lot more time. That is why to project the capital require may need to be done one year forward.
In the business world, liquidity revolves around you. To manage your money properly you have to consider the importance of liquidity. It can be evaluated with the following factors:
1. Investment period
Liquidity will be high if the investment is of shorter time, while for longer term it is much lower. Long term investments have stable payouts just as the nature of bonds. In longer term, the rate of return will be much lower.
If the liquidity is high, risk will be high and lower the liquidity, lower will be the risk occurrences.
There is an inverse relation between the liquidity and the sum. High liquidity will lead to smaller sum and lower liquidity have higher sum. We need another party to buy our investments on the other side while cashing out for cash. It can be stocks, bond or any type of business.
The importance can be determined by how the investor values such issues. For minimizing the risk in your investment you have to minimize the liquidity to avoid any financial failure in the business world.
Best Credit SG Pte Ltd is a licensed moneylender in Singapore. If you are having problems with your liquidity, we can help you with that! We have the lowest interest rates you can find in Singapore! 🙂 Drop us a message or call us at +65 6272 5538. Drop by our office for a free consultation @ Blk 372 Bukit Batok Street 31 #01-374 (Level 2) Singapore 650372