What was the crucial difference between American automobile manufacturers Ford Motor Company and General Motors in 2008? The answer is not products, marketing, or technology. The answer is liquidity. In the summer of 2008, as the financial world hurtled toward crisis, Ford had adequate liquidity to continue operations. General Motors did not. Ford survived, but General Motors went through bankruptcy. Without liquidity, a company loses business.
Liquidity management affects all aspects of a company. Do you ever wonder why your company doesn’t offer more credit to entice its customers? Why don’t you carry a larger selection of inventory? Why does your company keep so much money in marketable securities when important investment needs exist but remain unmet?
You make decisions every day that affect liquidity. When you add another color to the product mix, you add to inventory. When you change the production process, you affect the work-in-process inventory. When you change the credit relationship with your customers, you change your accounts receivable. When you decide whether to borrow short-term or long-term, you affect the notes payable and the current ratio. Every manager is a liquidity manager.
Liquidity lubricates the operations of a business much as oil lubricates a machine. But what is enough liquidity? What is too much liquidity? Why does too much liquidity reduce returns? What are the interactions between required liquidity and the nature of a company’s assets?
Are you ready to meet the challenge of understanding the effects of liquidity on your company? The Accenture Academy course Analyzing Liquidity Ratios for Effective Decision Making
will help you analyze the common liquidity ratios and the common-size balance sheet to determine the appropriate levels of current assets and current liabilities. Your ability to perform this analysis will help you develop the skills you need to enhance corporate profitability, control risk, and manage with confidence.