Liquidity – profitability trade-off a firm may be required to consider:
A firm needs to generate profits on returns to those who have their funds. At the same time, it needs liquidity in order to meet its day obligations. If the firm maintains a high level of liquidity, there is an opportunity cost in terms of the returns which are foregone had the funds invested. On the other hand if liquidity levels are too low, the firm may be unable to meet its obligations as and when they are due. This may be illustrated as follows:
Briefly explain the liquidity – profitability trade – off which a business enterprise may be required to consider in its financial management policies.
