How to maintenance of liquid assets to ensure frm has adequate cash? Asking the above-referenced question without statistics makes it impossible for anyone to give you a proper answer. Generally speaking, you must limit expenses and ensure that some of your assets are in the form of short term assets. The higher your short term assets and the less your short term debt, the better your ability to pay the debt (short term liquidity ratio / liquidity ratio help you determine this). There is no perfect number or ratio for every firm. Each industry/business is unique.
Strive to control debt (some debt is very good since it helps a business grow) and to maintain enough assets in the form of cash and cash equivalents Companies (Acceptance of Deposits) Rules, 1975 Maintenance of liquid assets (1) Every company shall, before the 30th day of April of each year, deposit or invest, as the case may be, a sum which shall not be less than 23[fifteen per cent] of the amount of its deposits maturing during the year ending on the 31st day of March next following in any one or more of the following methods, namely: a) in a current or other deposit account with any scheduled bank, free charge of lien; (b) in unencumbered securities of the Central Government or of any State Government; (c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882 (2 of 1882); 24[(d) in unencumbered bonds issued by the Housing Development Finance Corporation Limited, Bombay, a company incorporated under the Companies Act, 1956 (1 of 1956), and notified under clause (f) of section 20 of the Indian Trusts Act, 1882 (2 of 1882)]: 5[Provided that with relation to the deposits maturing during the year ending on the 31st day of March, 1979, the sum required to be deposited or invested under this sub-rule shall be deposited or invested before the 26[30th day of September, 1978]. ] Explanation. – For the purpose of this sub-rule, the securities referred to in clause (b) or clause (c) shall be reckoned at their market value. 2) The amount deposited or invested, as the case may be, under sub-rule (1), shall not be utilized for any purpose other than for the repayment of deposits maturing during the year referred to in that sub-rule, provided that the amount remaining deposited or invested, as the case may be, shall not at any time fall below 23[fifteen per cent] of the amount of deposits maturing until the 31st day of March of that year. ] Maintainence of Liquidity in Business One of the principal aims of a Manager is the maintenance of liquid assets.
Maintenance of liquid assets connotes that the firm always has enough cash in hand to pay for – 1. Recurring Expenses 2. To make unexpected large purchases 3. To meet emergencies at all times The best way to maintain a cash flow is to prevent overdue accounts and avert a blockage in the inflow of income. The ideal way to do this would be avoiding doing business with customers who have proven bad credit histories however, on the other hand rigid customer policies limiting the firms business with companies having only irreproachable credit records would deplete the firm’s pool of potential customers.
With the Management looking at expanding the business it becomes necessary to do business with most people who want to do business with you. The reality of a growing business is that the biggest and best clients also want sufficient billing period and then ask for two months time for making payments. Here is where the Manager is caught between two horns. While the firm does not want to lose clients or destroy any potential or established business relationships by laying down harsh payment terms, it is also necessary for the Manager to take some control of accounts receivable to avoid causing chaos with the cash flow.
Expansion of business requires extension of credit and when a firm extends credit, it is in effect loaning customers money, which in turn affects liquidity as any company wants to be reasonably sure that the money will be paid back. The primary step towards maintenance of liquid assets therefore commences with verification of ‘customer credit worthiness’. Certain steps can be taken to check whether the customer is good enough on his payments- 1. Check each company’s credit history before extending credit. 2. Check how long the company has been in business. 3. Obtain Credit Reports as they show historical payment data; bankruptcy records; any
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