The liquidity of a firm represents its ability to meet various short-term obligations using the quick conversion of the assets of the firm into cash. Note that cash is the most liquid version of a firm’s assets. Different types of assets can be used for different liquidity levels in the process of wind up company Singapore. For instance, the inventory of the firm is known as a liquid asset, but it is usually not as liquid as other assets in the company. It is observed that short-term money market securities are easier to convert into handsome cash.
Liquidity management can be defined as a firm’s ability to generate enough funds to meet requirements and liabilities. Several firms operate in conditions where they have enough money to operate, and there is no need to proceed ahead with liquidity. Instead, they focus on how to utilize available cash to maximize the returns of the shareholders.
On the other side, many firms experience tough financial conditions, and liquidity becomes their prime requirement. For such firms, it gets necessary to manage the liquidity effectively so that relevant problems can be avoided. The licensed insolvency practitioner can guide you on the entire process.
What are the sources of liquidity?
The sources of liquidity for a company are resources that companies can use to generate cash. They can be divided into two classes:
- Primary sources of liquidation are the ones that are either convertible resources or available as cash.
- The secondary sources of liquidation cannot be converted into cash as easily as primary sources.
The primary sources of liquidity usually include cash in the bank, cash flow management, and short-term funds, including trade credit and lines of credit. On the other side, secondary sources include filing for bankruptcy protection, liquidating assets, reorganizing, and negotiating debt contracts for reducing principal repayments or high-interest payments.
It is observed that secondary liquidating sources can affect the financial and operating positions of the company. Using various secondary sources for liquidity is a signal that the financial health of the company is worsening.
Factors affecting liquidity position of the firm
The liquidity position of the firm is greatly affected by cash inflows as well as cash outflows. When the cash flows are delayed or reduced, they refer to the drag on liquidity. The common examples include obsolete inventory, bad debt, and tight credit. On the other side, when there is an increase in the cash outflow, it is called pull-on liquidity. The examples of this category include poor liquidity conditions, limits on short-term line soy credit, reduced credit limits from suppliers, and making immediate payments to the employees or suppliers.
The disbursements and cash receipt timing can pose a considerable impact on the liquidation position of the company. When payment receipts are infrequent, a drag on liquidity may occur just because of the decreased fund availability.
When you are ready to wind up company Singapore, it is better to undergo the legal formalities and procedures first. Business owners can hire licensed insolvency practitioners to handle the entire procedure.