Liquidity mix, Financial Management

I am facing some problems in my assignment of Liquidity Mix. Can anybody suggest me the proper explanation for it?

Posted Date: 2/14/2013 2:15:52 AM | Location : United States





 

Liquidity Mix

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.

Management Policies

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.

Posted by Aliena | Posted Date: 2/14/2013 2:21:46 AM


Related Discussions:- Liquidity mix, Assignment Help, Ask Question on Liquidity mix, Get Answer, Expert's Help, Liquidity mix Discussions

Write discussion on Liquidity mix
Your posts are moderated
Related Questions
Fixed Weight Aggregates Method In fixed weight aggregates method, the weights used are neither from base period nor from current period but from a representative period. These

Why might it be very simple for an investor desiring to diversify his portfolio internationally to buy depository receipts as compared to the actual shares of the company? Answ

Tests of controlor systems based auditing Tests to obtain audit evidence about effective operation of the accounting and internal control systems. It isn't concerned about deta

Q. Selection of a project in Financial Management ? The selection of a project is typically made on the following line: (i) In general a project becomes acceptable if it has

Q. What do you understand by Business cycle? Business cycle: business cycle refers to the alternate expansion and contraction in the general business activity. in a period of t

How are financing costs generally incorporated into the capital budgeting analysis process? Financing costs are generally captured in the discount or hurdle rate while doing NPV

Question 1 State the key functions of the financial market. Question 2 Define "Bill of exchange". What are its features? Give different types of cheques. Question 3

Q. Major proportion of the maximum financing requirement? Whether the credit terms themselves is able to be changed may depend upon the credit terms of competitors when set alo

Q. Merits of net present value method? Merits of NPV method:- (i) Time value of funds is taken into consideration: - For the reason that this method takes into account the t

QUESTION (a) "A promissory note is an instrument in writing (not being a blank or a currency note) containing an unconditional undertaking, signed by the maker, to pay a certai