NEED AND IMPORTANCE OF LIQUIDITY MANAGEMENT :
The need for liquidity of current assets could not be over emphasized. The efficient management of liquidity is an integrated part of overall finance management and has a bearing on the objective of the consolidation of short-terms solvency position to achieve this. It is necessary to generate sufficient liquid fund. The extent to which liquidity can be gained will naturally depend on upon the magnitude of the sales. The efficiency of collection department the lowest period of operating cycle etc. a successful collection programmer is in other words, necessary for maintaining liquidity by any business enterprises. Those sales don't convert into cash is instantly remain a time lag between the sales of goods and receipt of cash.
There is, therefore, a need for liquidity in the form of cash and bank balance, marketable security, and bills receivables etc. will deal with the problem arising out of taking off immediately realization of current assets? Therefore sufficient liquidity is necessary to certain the ability to pay short-term obligations. Technically, liquidity depends on upon the production or cash cycling. The operating cycle can be said to be; the heart of the need for liquidity. "The continuing flow from cash to the supplier to inventory to account receivable and back into cash what is collected operating cycle."2 In other words, the terms cash cycle refused to the length of time necessary cycle events:
1.Conversion‖ of cash into inventory.
2. Conversion of inventory into receivable.
3. Conversion of receivable into cash."3
Thus, the operating cycle is a continuous process. If it were possible to complete the sequences instantaneously, there would no need of liquid fund. But since it is not possible; the firm is forced to have current assets. Since cash inflows and cash outflow don't match, firms have to necessity keep cash or investment in short-term liquid securities.
Therefore they will be in a position to meet due obligation as per requirement. Similarly, a business concern must have adequate Inventory to guard against the possibility of not being able to meet a demand for their products. Adequate inventory, therefore, provides a cushion against being out of stock. If the firms have to be competitive they must salse goods to their customers on credit which receivables the holding of the account receivable. It is in these ways that an adequate level of working capital is absolutely necessary for smooth sales activity which, in turn, enhances the liquid position of the concerns.
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