Low liquidity is not always bad sign, but stay alert

In a posting earlier shown that the high debt may, in some cases be good for business. Likewise, some books insist that "the greater liquidity, better." This is not true and use this rule in everyday life can lead to wrong decisions. 

We must clarify that the use of liquidity is widespread in business life. One possible reason is the combination of low liquidity and risk. Thus, it is believed that a company has a small volume of short term assets for short-term debts should be in financial difficulties. At the end of the year, the volume of short-term funds would be insufficient to repay the short-term obligations. 

However, the practical situation is more dynamic. Not always the short-term debt must be paid off at the end of the year. One example is some short-term loans that are automatically renewed by financial institutions.Moreover, the financial situation of a company is very dynamic, and usually measures the liquidity situation at a given date time. Therefore, measuring the liquidity of a company that sells a lot in the Christmas period may show low inventories, high cash and accounts receivable. 

A high liquidity can be a sign of inefficiency. Some books even say the absurdity that the ideal of a liquidity of a company is a ratio of two times the assets of short-term goals for short-term liabilities. Besides teaching wrong, they endanger the corporate business.Consider a supermarket. To be effective, a supermarket has to turn their inventories faster, try to spot sales and achieve the greatest possible time of their suppliers. Ie, the active short-term should be reduced (low inventory and receivables) and the short-term liabilities can be high (high-volume suppliers). An efficient supermarket must have low liquidity, not vice versa. 

Thus, a low liquidity can be good or bad, depending on the situation