3.

Financial Management
What will your outlook towards maintenance of liquid assets to ensure that the firm has
adequate cash in hand to meet its obligations at all times?

Almost every action of company has financial implications, manager responsible for or
with oversight of cash flow get directly involved in many functional areas of the
business. Cash flow manager although in large company the financial management
function may be broken down into various segments and the cash flow management
segment may concern itself primarily with short term management issues, or the daily
cash flow management task. Examples of these would be the maintenance of only
minimum balance in non-interest bearing bank accounts, the movement of excess cash
into short-term investment , and the maintenance of adequate cash balance to cover the
normal operating expenses of the company that must be paid from day to day. In any
event , those responsible for short term cash flow must consider the long term financial
management objective of the company. Objectives of the Financial Management 1.
To ensure that the company always has enough cash to meet its legal obligations and
avoid illiquidity i.e. to maintain adequate short term financial flexibility. 2.
To arrange to obtain whatever funds are required from external sources at the right
time , in the right form and the best possible terms. 3.
To ensure that the companies assets and liabilities ; current and long term, financial and
operating are utilized as effectively as possible. 4.
To forecast and plan for the financial requirement of future operations. 5.
To make all decisions & recommendations on the basis of one primary criterion,
maximizing the long term value of the organization . this objective is attained in a
publicly owned corporation through maximization of the wealth of the owner
[stakeholders] by maximizing stock price.
'Liquid Asset'
An asset that can be converted into cash quickly and with minimal impact to the price
received. Liquid assets are generally regarded in the same light as cash because their
prices are relatively stable when they are sold on the open market. Liquid assets are
cash on hand or any tangible or intangible item that can be converted quickly and easily
into cash, typically within 20 days, without losing much of their value. These assets are
among the most basic types of financial resources used by consumers, businesses, and
investors. Cash and checking accounts are the two most obvious forms of liquid assets.
Currency ::
Legal tender for purchases and to settle outstanding debts, currency remains the most
common type of liquid asset used consistently by retail consumers. Money that is
deposited into a current account is considered to be a liquid asset because it is possible

to immediately access the funds in order to settle debts. The debit card offers
consumers even greater access to immediate liquid assets.
Investments ::
Some interest-bearing investments can be liquidated quickly, qualifying them as liquid
assets. Money market fund shares, bonds, mutual funds, and the cash value of a life
insurance policy are examples of investments that can provide quick cash when
necessary. Certificates of deposit and stocks might also qualify under this definition.
While the actual market liquidity of each asset may vary, the key is that there are always
people looking to buy these items, so they can be sold relatively easily. In the case of
some jointly owned assets, only a percentage of an asset could be considered liquid.
Other Assets::
The final settlement awarded by a court for damages in a lawsuit could also be
considered to be a liquid asset, depending on the terms of payment specified by the
court. Tax refunds and the balances of trust funds are often included in the working
definition of liquid assets.
Less Liquid and Illiquid Assets ::
Mortgages are sometimes considered a liquid asset, but they are much less liquid than
many other types. Real estate is also more likely to sold at less than its value if it must
be liquidated quickly; if the market is unstable, it may be difficult to determine the true
value of real estate as well. Since a key part of liquidity is that the asset be sold at or
very near its actual value, this means that real estate is often considered "illiquid" or not
easy to sell. Any item for which there is no established value is not considered to be a
liquid asset, even if that item might be sold for a high price. When the market for the
item is small or uncertain, a sale could significantly affect its value. Even stock, usually
considered a liquid asset, could be illiquid if a large block is put up for sale, which could
lower its market value.
Business Assets::
For businesses, liquid assets can include cash, marketable securities, and receivables.
Cash equivalents, which can be quickly converted to cash as needed, are also
considered to be liquid. A business needs to be liquid enough to meet expenses, but not
have so much cash on hand that short-term investment opportunities are not pursued.
Companies often divide their assets into net liquid, quick, and current assets. Net liquid
assets are what would be left if all of the businesses debts were paid off. Quick assets
are those that can be converted into cash immediately, while current assets are those
that can be converted within a year. For an asset to be liquid it needs an established
market with enough participants to absorb the selling without materially impacting the
price of the asset. There also needs to be a relative ease in the transfer of ownership
and the movement of the asset. Liquid assets include most stocks, money market
instruments and government bonds. The foreign exchange market is deemed to be the
most liquid market in the world because trillions of dollars exchange hands each day,
making it impossible for any one individual to influence the exchange rate. Liquid assets
include items such as accounts receivable, demand and time deposits, gilt edged
securities. In some countries, precious metals (usually gold and silver) are also
considered liquid assets. Generally speaking, you must limit expenses and ensure that
some of your assets are in the form of short term assets. The higher your short term
assets and the less your short term debt, the better your ability to pay the debt (short

term liquidity ratio / liquidity ratio help you determine this).The ratio analysis will be the
guide stick for the liquidity ratio. Maintenance OF LIQUID ASSETS TO ENSURE
ADEQATE CASH IN HAND A common problem for small business owners is the
struggle to maintain adequate cash flow levels. Without cash, a business must
eventually close its doors. Understanding and managing the companys cash flow will
help to measure the amount of cash on hand and prepare for cash flow shortfalls in the
future. a. Do the Math : Cash flow is the movement of money in and out of a business.
Cash inflow is the movement of money into your business, and most likely comes from
the sale of goods or services to your customers. Cash outflow is the movement of
money out of your business, and is generally the result of paying expenses. By
projecting the inflow and outflow of your businesses cash, you can determine the
amount of cash that will be available during a designated period of time. b. Prepare Your
Profit and Loss Statement Your business plan should contain several financial
statements. If youre a start-up businessman, base your estimates of cash inflow and
outflow on the revenues and expenses listed in your profit and loss statements.
Complete your profit and loss statement before completing your cash flow statement.
Over time, you will be able to base cash inflows and outflows on actual historical data.
c. Develop a Cash Flow Statement: A cash flow statement measures cash flow over
time. During your first year in business, you should include a month-by-month cash flow
statement in your business plan. If youre seeking a loan, an important feature of your
cash flow statement is that it will show the lender exactly how youre going to afford loan
payments. In order for a business to stay afloat, it must maintain an adequate level of
cash. These are some which we can apply to improve the cash flow in our organization.
Adequate cash means that you can meet your obligations. It is to remember that cash is
king and life blood of the organization. The following points help make it easier to
maintain the adequate cash level and an improvement in cash position can be seen
sooner rather than later: 1. Check Customers Credit Histories: Decide the type of
customer to whom you want to extend credit. Do you want to have a particular cut-off
credit score? If you extend credit to customers with questionable credit histories or low
credit scores, you may experience late payments or no payments, which will slow down
your cash flow and increase your collection costs. 2. Keep Track of Your Customers
Payments: Have up-to-date payment records. Keep accurate payments records by
using a specialized accounting software program that will keep track of your invoices
and when payments are made. If customers are late with their payments, it could cause
a cash flow bottleneck for you. Accurate record keeping will help solve this problem. 3.
Set Appropriate Credit Terms and Offer a Cash Discount : Make sure your customers
understand how long they have to pay their bill. In order to speed up the cash they pay,
you might want to offer a cash discount to any customer that pays in a short period of
time, designated by you, or to a customer who pays cash. 4. Extend Your Timetable for
Making Cash Payments :: Pay your bills on time and take advantage of any cash
discounts your suppliers offer you. However, hold onto your cash as long as possible.
Dont pay bills weeks earlier than they are due. Your company can use that cash
balance, rather than letting your supplier use your companys cash. 5. Cut Back on
Spending Wherever Possible : Do you really need to take money out of your business
for a Hawaiian vacation right now? Cut back on spending until it is less than your
revenue on a month-by-month basis. If an emergency happens, then you will be

prepared from a cash standpoint. 6. Increase Your Sales : Make sure you arent holding
on to obsolete inventory. If you are, mark it down and sell it. Storing it is costing you
money and selling it at a lower price is better than not selling it at all. The longer you
hold on to obsolete inventory, the less likely it is to sell. 7. Think before investing : The
price and value of investments and their income fluctuates: you may get back less than
the amount you invested. Remember that how an investment performed in the past is
not a guide to how it will perform in the future. We need to project the cash flow
statement, and employee the companies fund in short term investment. Along with that
we have to check expenses. And maintain the liquid assets. Projected cash flow
statement is the guided stick. Our sales, realizations, and fixed and variable expenses
need to be kept in mind while judging the balanced need of liquid assets. We may
consider the short term investments with reference to interest rate and surplus funds.
Generally it is indispensable that we must limit expenses and ensure that some of the
assets are in the form of short term assets. The higher short term assets and the less
your short Term debt, the better your ability to pay the debt (short Term liquidity ratio /
liquidity ratio help you determine this). The ratio analysis will be the guide stick for the
Liquidity ratio. The short term creditors of a company like supplies of good of credit and
Commercial banks providing short-term loans, are primarily interested in knowing the
companies ability to meet its current or short term obligations of a firm can be met only
when there are sufficient liquid assets. Therefore, a firm must ensure that it does not
suffer from lack of liquidity or the capacity to pay its current obligations due to lack of
good liquidity position, its goodwill in the market is likely to be effected beyond repair.
Liquidity refers to the ability of a concern to meet its current obligations as and when
there become due. The short-term obligations are met by realizing amounts from
current, floating or circulating assets. The current assets should either be liquid or near
liquidity. These should be convertible into cash for paying obligations of short-term
nature. The sufficiently or insufficiency of current assets should be assessed by
comparing them with short term liabilities. If current assets can pay off current liabilities,
then liquidity position will be satisfactory. The standard current ratio is 1: 1.33 means
any firm / company is having adequate funds to meet its obligation in time. The firm has
to maintain core current assets which is easily realizable at all times. The laid down
bench mark ratio to maintain the ratio of core current assets to current liabilities is 1:1.