Reasons of Liquidity Reduction

Reasons of Liquidity Reduction

Liquidity reduction is referred to a situation, where current asset are not increasing with same rate as current liabilities. It means when current liabilities are rising at higher rate than current asset. This situation will result in more current liabilities and less current asset.

1.    Operating Losses

Liquidity reduction reason includes operating losses i.e. operating losses is financed by the current assets and therefore current asset are reducing. It means to improve current asset ratio, organization must improve its profitability.

2.    Purchase of Fixed Asset

Liquidity reduction reasons also include purchase of fixed assets i.e. utilization of cash for the purpose of fixed asset; it means that no less cash is available for operational payment.

3.    Loan Repayment

Liquidity reduction may also be due to a loan repayment. It means that due to huge cash outflow of loan installment, current asset has declined. Loan payment will deteriorate the liquidity within organization.