Question

5.1 Explain three(3) reasons why liquidity or holding onto cash is important. 5.2 Discuss the measures a business can put in place to try to rectify a poor payment culture by its debtors.

Answer 1

Importance of holding onto cash or cash equivalents (liquid assests)

Liquid Assets : Any assest that can be converted into cash within short period (one year or less) is called liquid assest.

following are the three importance :

1) short-term loan or debt repayment : short-term loans are the loans with repayment period of less than 1 year . hence , it is very importnant to hold cash or liquid assest which can br easily converted into cash in short period for repayment of debt .

2) Helps in avoiding losses : liquid assest or cash helps in avoiding possible losses that can occure due to immidiate sale of fixed assest as the buyer for fixed assests are not available immidiately hence in order to sell the fixed assest quickly it requires to give some rebate or sell the assest at a lower rate or priced than the original market price .

3) Helps in avoiding losses in volatile markets : If optimum cash is held in hand and the funds are not over invested in fixed assests or securities , this willl help us to avoid losses when the economy or market is down . we would have lost the money or funds that are currently held in hand if we invested during this time .

Measures a business can put in place to try to rectify a poor payment culture by its debtors

1 ) Offer partial waivers : we can offer partial waivers to debters or some fixed amount waiver for timely payment of dues . This will provide motivation to debtors to pay the dues on time . we should do this without doing much harm to our profitability .

2) Penalty for late payment : we can put penalty if the debtors fail to pay due on time , this will make them pay the dues on time due to burden of extra cost .

3) Know the debtors : we should do a proper background check of the debtors or borrowers before granting them credit .

Doing so will help us in avoiding such unwanted circumstances .