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I.

Introduction
Generally, after the financial analysis of a company, firms tend to focus more on profitability than
on liquidity. Most firms are highly concerned on profit maximization while management of its
liquidity is often being ignored. The profitability of a company can by described as its ability to
generate income which surpasses its liabilities. Profitability is usually measured
by
different ratios such as ROA and ROE.(www.businessdictionary.com) Nonetheless, it is
undeniable that liquidity is also a very essential element. Businesses now had an increased or
growing concern on its respective management of its liquidity.
Efficient
liquidity management involves planning and controlling current assets and
current liabilities in such a manner that eliminates the risk of the inability to meet due
short-term obligations, on one hand, and avoids excessive investment in these assets, on the
other. It is a companys ability to pay its operating expenses and short-term financial obligations
using its liquid assets. According to Shim and Siegel (2000, pp.46-47) accounting
liquidity is the companys ability to liquidate maturing short-term debt (within one
year). Liquidity is considered by stakeholders as one of the most important
characteristics of a company. To maintain an adequate level of liquidity is not just a
corporate goal, it is a condition that a company must reach in order to continue the
operations of a business. Every stakeholder has interest in the liquidity situation of a
company. Taking for example, suppliers of goods would like to review the liquidity of
the company before selling goods on credit so as to ensure that the company may be
able to easily pay back its obligations. Employees would likely also to be worried and
concerned about the liquidity of a company to know whether the company would be
able to cover and pay on time its employee related obligations such as salaries,
fringe benefits, pension and such.
In understanding liquidity, the lower the liquidity ratio, the greater the chance that the company is,
or may soon is, suffering financial difficulty. However, a high liquidity ratio does not necessarily
mean that it is a good thing for a company. A very high value liquidity ratio may mean that a
company that is overly focused on liquidity, which can be detrimental to the effective use of capital
and expansion of the business. A company may have a very impressive-looking liquidity ratio but
due to its high liquidity level, it may cause analysts and investors to look unfavourably on the firm
such when these investors and analysts not only are focused on the level of liquidity the firms
have but it also consider at the same time other measures of a companys performance such as
the profitability ratios of return on capital employed (ROCE) or return on equity (ROE)
Liquidity management, in most cases, are considered from the perspective of
working capital management as most of the ratios being used for measuring a firms liquidity
are part of the components of working capital. Experts say that the main goal of working
capital management is focused on enabling the firm to maximize its profits from its operations
while meeting at the same time, both its short term debt and upcoming operational expenses,
to preserve liquidity. However, focusing on increasing ones profitability would tend to reduce
firms liquidity. No doubt, every firm tries to maximize its own profitability. However, increasing
profits at the cost of liquidity might cause serious trouble to the firm and this problem might lead
to financial insolvency as well. Thus an effective WCM would be needed to strike a balance
between the two core objectives of the firm. It is essential that the firms liquidity should be
properly balanced. Because, excessive liquidity on one hand indicates the accumulation of idle
funds that dont fetch any profits for the firm and on the other hand, insufficient liquidity might
damage the firms goodwill, deteriorate firms credit standings and that might lead to
forced liquidation of firms assets. Afterwards problems like bankruptcy and insolvency might

happen. To sum up, a company unable to make profits might be termed as a sick company
but, a company having no liquidity might cease to exist.

Liquidity management and profitability both play significant roles in the development, survival,
sustainability, growth and performance of firms and therefore it necessary for firms to strike a
good balance between the two end goals. Liquidity management is a concept that is receiving
serious attention in different parts of the world considering the current financial situations and
economic state in the world. One of the main challenges that business owners and managers
must face is the continuous work towards devising a strategy of managing their day to day
operations in order to meet their obligations as they become due and also increase profitability
and shareholders wealth.

II.

Significance of the Study


Liquidity plays a significant role in the successful functioning of a business firm.
A firm should ensure that it does not suffer from lack-of or excess liquidity to meet its
short-term compulsions. A study of liquidity is of major importance to both the
internal and the external analysts because of its close relationship with day-to-day
operations of a business (Bhunia,2010)

The crucial part in managing working capital is required maintaining its liquidity in day-to-day
operation to ensure its smooth running and meets its obligation (Eljelly, 2004). Liquidity plays a significant
role in the successful functioning of a business firm.

Experts say that the main goal of working capital management is focused on enabling the firm
to maximize its profits from its operations while meeting at the same time, both its short term debt
and upcoming operational expenses, to preserve liquidity. However, focusing on increasing ones
profitability would tend to reduce firms liquidity. No doubt, every firm tries to maximize its own profitability.
However, increasing profits at the cost of liquidity might cause serious trouble to the firm and this problem
might lead to financial insolvency as well. Thus an effective WCM would be needed to strike a balance
between the two core objectives of the firm. It is essential that the firms liquidity should be properly
balanced. Because, excessive liquidity on one hand indicates the accumulation of idle funds that dont
fetch any profits for the firm and on the other hand, insufficient liquidity might damage the firms
goodwill, deteriorate firms credit standings and that might lead to forced liquidation of firms
assets. Afterwards problems like bankruptcy and insolvency might happen. To sum up, a company
unable to make profits might be termed as a sick company but, a company having no liquidity might
cease to exist.

The relationship between working capital and the profitability has been an
interesting debate in financial management. Theoretically working capital
decision affects both liquidity and profitability. Excess of Investment in
working capital may result in low profitability and lower investment may
result in poor liquidity. Management need to consider the trade-off
between liquidityand profitability to maximize shareholders wealth. Every
organization whether, profit oriented or not, irrespective of size and nature of
business, requires necessary amount of working capital. Working capital is
the most crucial factor for maintaining liquidity, survival, solvency and
profitability of business (Mukhopadhyay, 2004).
Liquidity management is a concept that is receiving serious attaintion all over the world
especially with the current financial situations and the state of the world econony. The
conern of business owners and managers all over the world is to devise a strategy of
managing their day to day operations in order to meet thier obligations as they fall due and
increase profitability and shareholders wealth. Liquidity management, in most cases, are
considered from the perspective of working capital management as most of the indices used
for measring corporate liquidity are a function of the components of working capital.
The importance of liquidity management as it affects corporate profitability in todays
business cannot be over empahsis. The crucial part in managing working capital is required
maintaining its liquidity in day-to-day operation to ensure its smooth running and meets its
obligation (Eljelly, 2004). Liquidity plays a significant role in the successful functioning of a
business firm. A firm should ensure that it does not suffer from lack-of or excess liquidity to
meet its short-term compulsions. A study of liquidity is of major importance to both the
internal and the external analysts because of its close relationship with day-to-day
operations of a business (Bhunia, 2010). Dilemma in liquidity management is to achieve
desired trade off between liquidity and profitability (Rahemanet all, 2007).
Liquidity requirement of a firm depends on the peculiar nature of the firm and there is no
specific rule on determining the optimal level of liquidity that a firm can maintain in order to
ensure positive impact on its profitability.
For the purpose of this study liquidity management is viewed from the aspect of companys
credit policy, it cash flow management and cash conversion cycle. Liquidity in itself, for the
purpose of this research, is measured in terms of current asset ratios, quick ratio and
operating cashflow. This research work is hinged on the schumpeter theory of profitability as
stated above.