Significance of Liquidity

Significance of Liquidity

Liquidity is a concept related to sufficiency of cash i.e. organization must have sufficient cash to remain operation & functional.  Organization requires cash or funds for many purposes which include operational payment, loan payments, and payment to supplier.

1.    Operational Expenses

Liquidity is a fundamental requirement for the organization to remain functional and operational.  In case of failing to pay operational expenses, it would be difficult for the organization to remain functional & operational in the market.

2.    Loan Payment

Liquidity is also required for the payment of loan obligation i.e. loan installment. In case default, organization may be declared as insolvent. There are number of disadvantages associated with insolvency and company will face those disadvantages.

3.    Goodwill

Liquidity is required to maintain goodwill of the organization. Delayed or nonpayment of obligation damages reputation of the organization, and organization may face difficulties for arranging new finances in cases of default history.

4.    Supplies

Liquidity is also necessary for making payment to the supplier. In case of default, the supplies may be stopped by the supplier, and organization would not be able to continue production. It will also reduce the free credit facility (credit supply).