Name : Mr.

Abhay Munj e
Roll No.: N14FEB/ 2281
Assignment : Semest er I



Page 1 of 6
Financial Management
What will your out look t owar ds maint enance of liquid asset s t o ensur e t hat t he
fir m has adequat e cash in hand t o meet it s obligat ions at all t imes?

:: ANSWER ::

Almost ever y act ion of company has financial implicat ions, manager r esponsible
for or wit h over sight of cash flow get dir ect ly involved in many funct ional ar eas
of t he business.
Cash flow manager alt hough in lar ge company t he financial management
funct ion may be br oken down int o var ious segment s and t he cash flow
management segment may concer n it self pr imar ily wit h shor t t er m management
issues, or t he daily cash flow management t ask. Examples of t hese would be t he
maint enance of only minimum balance in non- int er est bear ing bank account s,
t he movement of excess cash int o shor t - t erm invest ment , and t he maint enance
of adequat e cash balance t o cover t he nor mal operat ing expenses of t he
company t hat must be paid fr om day t o day.
I n any event , t hose r esponsible for shor t t er m cash flow must consider t he long
t er m financial management obj ect ive of t he company.
Obj ect ives of t he Financial Management
1. To ensur e t hat t he company always has enough cash t o meet it s legal
obligat ions and avoid illiquidit y i. e. t o maint ain adequat e shor t t er m
financial f lexibilit y.
2. To arr ange t o obt ain what ever funds ar e r equir ed fr om ext er nal sour ces at
t he r ight t ime , in t he r ight for m and t he best possible t er ms.
3. To ensur e t hat t he companies asset s and liabilit ies ; cur r ent and long
t er m, financial and operat ing ar e ut ilized as effect ively as possible.
4. To for ecast and plan for t he financial r equir ement of fut ur e oper at ions.
5. To make all decisions & r ecommendat ions on t he basis of one pr imar y
cr it er ion, maximizing t he long t er m value of t he or ganizat ion . t his
obj ect ive is at t ained in a publicly owned corporat ion t hr ough maximizat ion
of t he wealt h of t he owner [ st akeholder s] by maximizing st ock pr ice.

' Liquid Asset '

An asset t hat can be conver t ed int o cash quickly and wit h minimal impact t o t he
pr ice r eceived. Liquid asset s ar e gener ally r egarded in t he same light as cash
because t heir pr ices ar e r elat ively st able when t hey ar e sold on t he open mar ket .

Liquid asset s ar e cash on hand or any t angible or int angible it em t hat can be
conver t ed quickly and easily int o cash, t ypically wit hin 20 days, wit hout losing
much of t heir value. These asset s ar e among t he most basic t ypes of financial
r esour ces used by consumer s, businesses, and invest or s. Cash and checking
account s ar e t he t wo most obvious for ms of liquid asset s.
Name : Mr. Abhay Munj e
Roll No.: N14FEB/ 2281
Assignment : Semest er I



Page 2 of 6

Cur r ency : : Legal t ender for pur chases and t o set t le out st anding debt s, cur r ency
r emains t he most common t ype of liquid asset used consist ent ly by r et ail
consumer s. Money t hat is deposit ed int o a cur r ent account is consider ed t o be a
liquid asset because it is possible t o immediat ely access t he funds in order t o
set t le debt s. The debit car d offer s consumer s even gr eat er access t o immediat e
liquid asset s.

I nvest ment s : : Some int er est - bear ing invest ment s can be liquidat ed quickly,
qualifying t hem as liquid asset s. Money mar ket fund shar es, bonds, mut ual
funds, and t he cash value of a life insur ance policy ar e examples of invest ment s
t hat can pr ovide quick cash when necessar y. Cer t ificat es of deposit and st ocks
might also qualify under t his definit ion. While t he act ual mar ket liquidit y of each
asset may var y, t he key is t hat t her e ar e always people looking t o buy t hese
it ems, so t hey can be sold r elat ively easily. I n t he case of some j oint ly owned
asset s, only a per cent age of an asset could be consider ed liquid.

Ot her Asset s: : The f inal set t lement awarded by a cour t for damages in a lawsuit
could also be consider ed t o be a liquid asset , depending on t he t erms of
payment specified by t he cour t . Tax r efunds and t he balances of t r ust funds ar e
oft en included in t he wor king definit ion of liquid asset s.

Less Liquid and I lliquid Asset s : : Mor t gages ar e somet imes consider ed a liquid
asset , but t hey ar e much less liquid t han many ot her t ypes. Real est at e is also
mor e likely t o sold at less t han it s value if it must be liquidat ed quickly; if t he
mar ket is unst able, it may be difficult t o det er mine t he t r ue value of r eal est at e
as well. Since a key par t of liquidit y is t hat t he asset be sold at or ver y near it s
act ual value, t his means t hat r eal est at e is oft en consider ed "illiquid" or not easy
t o sell.

Any it em for which t her e is no est ablished value is not consider ed t o be a liquid
asset , even if t hat it em might be sold for a high pr ice. When t he mar ket for t he
it em is small or uncer t ain, a sale could significant ly affect it s value. Even st ock,
usually consider ed a liquid asset , could be illiquid if a lar ge block is put up for
sale, which could lower it s mar ket value.

Business Asset s: : For businesses, liquid asset s can include cash, mar ket able
secur it ies, and r eceivables. Cash equivalent s, which can be quickly conver t ed t o
cash as needed, ar e also consider ed t o be liquid. A business needs t o be liquid
enough t o meet expenses, but not have so much cash on hand t hat shor t - t erm
invest ment oppor t unit ies ar e not pur sued.

Companies oft en divide t heir asset s int o net liquid, quick, and cur r ent asset s.
Net liquid asset s ar e what would be left if all of t he businesses debt s wer e paid
off. Quick asset s ar e t hose t hat can be conver t ed int o cash immediat ely, while
cur r ent asset s ar e t hose t hat can be conver t ed wit hin a year.


For an asset t o be liquid it needs an est ablished mar ket wit h enough par t icipant s
Name : Mr. Abhay Munj e
Roll No.: N14FEB/ 2281
Assignment : Semest er I



Page 3 of 6
t o absorb t he selling wit hout mat er ially impact ing t he pr ice of t he asset . Ther e
also needs t o be a r elat ive ease in t he t r ansfer of owner ship and t he movement
of t he asset . Liquid asset s include most st ocks, money mar ket inst r ument s and
gover nment bonds. The for eign exchange mar ket is deemed t o be t he most
liquid mar ket in t he wor ld because t r illions of dollar s exchange hands each day,
making it impossible for any one individual t o influence t he exchange r at e.

Liquid asset s include it ems such as account s r eceivable, demand and t ime
deposit s, gilt edged secur it ies. I n some count r ies, pr ecious met als ( usually gold
and silver ) ar e also consider ed liquid asset s.

Gener ally speaking, you must limit expenses and ensur e t hat some of your
asset s ar e in t he for m of shor t t er m asset s. The higher your shor t t er m asset s
and t he less your shor t t er m debt , t he bet t er your abilit y t o pay t he debt ( shor t
t er m liquidit y r at io / liquidit y r at io help you det er mine t his) . The r at io analysis
will be t he guide st ick for t he liquidit y r at io.

Maint enance OF LI QUI D ASSETS TO ENSURE ADEQATE CASH I N HAND
A common pr oblem for small business owner s is t he st r uggle t o maint ain
adequat e cash flow levels. Wit hout cash, a business must event ually close it s
door s. Under st anding and managing t he companys cash flow will help t o
measur e t he amount of cash on hand and pr epar e for cash flow shor t falls in t he
fut ur e.
a. Do t he Mat h : Cash flow is t he movement of money in and out of a
business. Cash inflow is t he movement of money int o your business, and most
likely comes fr om t he sale of goods or ser vices t o your cust omer s. Cash out flow
is t he movement of money out of your business, and is generally t he r esult of
paying expenses. By pr oj ect ing t he inf low and out flow of your businesses cash,
you can det er mine t he amount of cash t hat will be available dur ing a designat ed
per iod of t ime.

b. Pr epar e Your Pr ofit and Loss St at ement Your business plan should
cont ain sever al f inancial st at ement s. I f your e a st ar t - up businessman, base your
est imat es of cash inflow and out flow on t he r evenues and expenses list ed in your
pr ofit and loss st at ement s. Complet e your pr ofit and loss st at ement befor e
complet ing your cash flow st at ement . Over t ime, you will be able t o base cash
inflows and out flows on act ual hist or ical dat a.

c. Develop a Cash Flow St at ement : A cash flow st at ement measur es cash
flow over t ime. Dur ing your fir st year in business, you should include a mont h-
by- mont h cash flow st at ement in your business plan. I f your e seeking a loan, an
impor t ant feat ur e of your cash flow st at ement is t hat it will show t he
lender exact ly how your e going t o affor d loan payment s.

I n or der for a business t o st ay afloat , it must maint ain an adequat e level of cash.
These ar e some which we can apply t o impr ove t he cash flow in our
or ganizat ion. Adequat e cash means t hat you can meet your obligat ions. I t is t o
r emember t hat cash is king and life blood of t he or ganizat ion. The following
point s help make it easier t o maint ain t he adequat e cash level and an
Name : Mr. Abhay Munj e
Roll No.: N14FEB/ 2281
Assignment : Semest er I



Page 4 of 6
impr ovement in cash posit ion can be seen sooner rat her t han lat er :

1. Check Cust omer s Cr edit Hist or ies: Decide t he t ype of cust omer t o
whom you want t o ext end cr edit . Do you want t o have a par t icular cut - off
cr edit scor e? I f you ext end cr edit t o cust omer s wit h quest ionable cr edit hist or ies
or low cr edit scor es, you may exper ience lat e payment s or no payment s, which
will slow down your cash flow and incr ease your collect ion cost s.

2. Keep Tr ack of Your Cust omer s Payment s: Have up- t o- dat e payment
r ecor ds. Keep accurat e payment s r ecords by using a specialized account ing
soft war e pr ogram t hat will keep t r ack of your invoices and when payment s
ar e made. I f cust omer s ar e lat e wit h t heir payment s, it could cause a cash flow
bot t leneck for you. Accurat e r ecord keeping will help solve t his pr oblem.

3. Set Appr opr iat e Cr edit Ter ms and Offer a Cash Discount : Make sur e
your cust omer s under st and how long t hey have t o pay t heir bill. I n or der t o
speed up t he cash t hey pay, you might want t o offer a cash discount t o
any cust omer t hat pays in a shor t per iod of t ime, designat ed by you, or t o a
cust omer who pays cash.

4. Ext end Your Timet able for Making Cash Payment s : : Pay your bills on
t ime and t ake advant age of any cash discount s your supplier s offer you.
However , hold ont o your cash as long as possible. Dont pay bills weeks
ear lier t han t hey ar e due. Your company can use t hat cash balance, r at her t han
let t ing your supplier use your companys cash.

5. Cut Back on Spending Wher ever Possible : Do you r eally need t o t ake
money out of your business for a Hawaiian vacat ion r ight now? Cut back on
spending unt il it is less t han your r evenue on a mont h- by- mont h basis. I f an
emer gency happens, t hen you will be pr epar ed fr om a cash st andpoint .

6. I ncr ease Your Sales : Make sur e you ar ent holding on t o obsolet e
invent or y. I f you ar e, mar k it down and sell it . St or ing it is cost ing you money
and selling it at a lower pr ice is bet t er t han not selling it at all. The longer you
hold on t o obsolet e invent or y, t he less likely it is t o sell.

7. Think befor e invest ing : The pr ice and value of invest ment s and t heir
income fluct uat es: you may get back less t han t he amount you invest ed.
Remember t hat how an invest ment per for med in t he past is not a guide t o
how it will per for m in t he fut ur e.

We need t o pr oj ect t he cash flow st at ement , and employee t he companies fund
in shor t t er m invest ment . Along wit h t hat we have t o check expenses. And
maint ain t he liquid asset s. Pr oj ect ed cash flow st at ement is t he guided st ick.

Our sales, r ealizat ions, and fixed and var iable expenses need t o be kept in mind
while j udging t he balanced need of liquid asset s. We may consider t he shor t
t er m invest ment s wit h r efer ence t o int er est r at e and sur plus funds. Generally it
Name : Mr. Abhay Munj e
Roll No.: N14FEB/ 2281
Assignment : Semest er I



Page 5 of 6
is indispensable t hat we must limit expenses and ensur e t hat some of t he asset s
ar e in t he for m of shor t t er m asset s.

The higher shor t t er m asset s and t he less your shor t Term debt , t he bet t er your
abilit y t o pay t he debt ( shor t Term liquidit y r at io / liquidit y r at io help you
det er mine t his) . The r at io analysis will be t he guide st ick for t he Liquidit y r at io.

The shor t t er m cr edit or s of a company like supplies of good of cr edit and
Commer cial banks pr oviding shor t - t er m loans, ar e pr imar ily int er est ed in
knowing t he companies abilit y t o meet it s cur r ent or shor t t erm obligat ions of a
fir m can be met only when t her e ar e sufficient liquid asset s. Ther efor e, a fir m
must ensur e t hat it does not suffer fr om lack of liquidit y or t he capacit y t o pay
it s cur r ent obligat ions due t o lack of good liquidit y posit ion, it s goodwill in t he
mar ket is likely t o be eff ect ed beyond r epair . Liquidit y r efer s t o t he abilit y of a
concer n t o meet it s cur r ent obligat ions as and when t her e become due.

The shor t - t er m obligat ions ar e met by r ealizing amount s fr om cur r ent , float ing
or cir culat ing asset s. The cur r ent asset s should eit her be liquid or near liquidit y.

These should be conver t ible int o cash for paying obligat ions of shor t - t er m
nat ur e. The sufficient ly or insufficiency of cur r ent asset s should be assessed by
compar ing t hem wit h shor t t erm liabilit ies.

I f cur r ent asset s can pay off cur r ent liabilit ies, t hen liquidit y posit ion will be
sat isfact or y. The st andar d curr ent rat io is 1: 1. 33 means any fir m / company is
having adequat e funds t o meet it s obligat ion in t ime. The fir m has t o maint ain
cor e curr ent asset s which is easily r ealizable at all t imes. The laid down bench
mar k rat io t o maint ain t he r at io of cor e cur r ent asset s t o cur r ent liabilit ies is 1: 1.








Name : Mr. Abhay Munj e
Roll No.: N14FEB/ 2281
Assignment : Semest er I



Page 6 of 6