Does Liquidity Really Matter?

Paper Summary:

This paper is about the importance of liquidity. The writer shows how all organizations need to be liquid because the need for cash can arise at any time. Banks are especially vulnerable to liquidity crises, as happened in the Asian crisis. The concept of asset management is examined as a way to meet liquidity needs.

From the Paper:

"Yes, liquidity is very important, to say the least. And what exactly is liquidity since it is important to know about? Liquidity is the indication of the organization's ability to meet its current and maturing obligations as they come due; it is the near term cash perspective of the business; and it is cash fuel supply management. The implications of liquidity are that typically lenders will default or shut off credit first to operations with: marginal or negative liquidity, (particularly when coupled with) high debt to asset amounts. Liquidity has one essential rule: be liquid with appropriate working capital. Liquidity is a vital financial concept, as during good times, more expansion/growth opportunities exist due to it; during bad times, still more expansion/growth opportunities exist; liquidity provides revenue opportunities as commodities can be held through low prices; liquidity often reduces costs with lower interest rates; liquidity reduces stress; and during difficult times, sufficient cash stays in business (Birch, 2000). "

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