Business liquidity

Having sufficient amount of liquidity in the business is very importance now days because the increased size of business transactions. Managements today spend a lot of time and efforts to maintain proper liquidity position in business.
Business liquidity has been interpreted in several ways. In one sense, it refers to the position of net working capital of the firm. In another, it means cash and cash equivalent balances of the firm. Net working capital approach has traditionally been quite dominant. It suggests that liquidity of the firm depends upon the position of its net working capital. During an accounting period, working capital or funds flow from one element of balance sheet to another and according to this approach. It is the amount of net working capital which is available to the firm as liquid resource. A statement that uses net working capital as a liquidity position is referred to as fund flow statement, and its analysis as fund flow analysis.
Cash and cash equivalent basis or simply cash basis, which is another way in which liquidity position of the firm is conceived. Marketable securities are considered as cash equivalent under this approach. The change in the amount of cash and its equivalents during the accounting period reflects liquidity position. This implies that many of the items which do not change NWC position but affect cash position of the firm are analyzed. For example collection of money from accounts receivables doesn’t change the net working capital of the firm, as it neutralizes the impact of an increase in one element of working capital by an equivalent decrease in another element that is accounts receivables. But it does not affect the cash position of the firm and is, therefore, included in the cash basis analysis. The statement prepared on cash basis or liquidity is called cash flow statement and its analysis is referred to as cash flow analysis.
Normally fund flow analysis is the detailed analysis of the net working capital position of the firm. It helps management to administer and control the amount of total working capital, its various elements and also it’s financing. In fact this analysis can greatly facilitate a critical review of the liquidity position.
Another analysis called cash flow analysis based on fund flow statement which doesn’t take into account the off-setting movements among the individual current assets and liabilities. An increase or decrease in the individual elements of current assets and liabilities affect cash in different ways.
Thus having sufficient business liquidity depends on the management decision.