Q. Determining Optimum Liquid Balance?

Liquid balance (balance of cash and marketable securities) must be maintained at the optimum level. It is the level which gives the minimum cost of holding the liquid balance. Determination of such a level is very important for an efficient cash management. If the liquid balance exceeds the required balance, it remains idle and, therefore, it involves opportunity costs in the sense that the amount could 1ij have been put to more effective use. None the less, 8 liquidity position of the enterprise becomes more sounds. On the other hand, if liquid balance is short of the requirements, the firm may have to incur shortage costs. The firm may be required to sell its fixed investments or it may have to resort to fresh borrowings' total Cost Opportunity costs Shortage.