Liquidity mix consider to the combination of several liquid investments in a company''s portfolio. There are several factors that affect the mix of liquidity. They are:
Uncertainty of Cash Flow Projections
The basic factor affecting liquidity mix is the uncertainty regarding the cash inflow and outflow estimates. Cash flows cannot be predicted along with utmost accuracy. Cash inflows involve receipts from collections, cash sales, from credit customers, disposal of old assets, proceeds from sale of investments, procurement of loans, issuance of stock, etc. All these types of inflows cannot be predicted with 100% certainty. For example, the past records of accounts receivables may reveal an average collection period of 30-45 days. Based upon the past data, one cannot really predict that all the accounts receivables would be collected by 45 days. If you approximate so and prepare the cash budget consequently, you may at times find surplus availability of cash throughout some period for investment. It may so happen that one or two customers become bankrupt and their balances to be written off. So uncertainty prevails. Cash outflows involve payment to creditors, payments to meet all the planned retirement, operating expenses, of bonds or loans etc. There is as well some amount of uncertainty regarding the period and magnitude of outflows. So, cash budget though serves as an important tool for estimating the surplus of cash, cannot be relied upon with 100% certainty for timing and magnitude of cash inflows and outflows, finally affecting liquidity mix.
The liquidity mix is as well as determined by the policies and decisions of the management. It depends on the risk-return perceptions and attitude of the management. If the management is risk-averse, will choose to maintain liquid cash balance lying idle without return than to invest in risky short-term securities. It may as well invest some money in Treasury bill types of securities that are risk-free. However if the management prefers a higher return over liquidity it may opt for high-risk high-return securities.