Sunday, July 28, 2019

Critically Evaluate why the Liquidity of a Firm is Considered Crucial Essay

Critically Evaluate why the Liquidity of a Firm is Considered Crucial Especially in the Growth Stage of a Company's Development - Essay Example Current paper focuses on a particular aspect of organizational performance: liquidity, a term used in order to show the potentials of an organization to meet its liabilities. Emphasis is given on the significance of liquidity in the growth stage of the company development. At the same time, efforts are made in order to identify the terms under which the changes in the financial statement of a particular organization can influence the organization’s value creation process. The literature published in regard to these issues has been reviewed and evaluated; it is made clear that the role of liquidity in the growth stage of the company development can be differentiated. As of the changes on a firm’s financial statements, these seem as unavoidable especially under the following terms: the value creation process of each organization is based on specific organizational data; changes on the particular data could influence the validity of the assumptions made in regard to the ec onomic status of the organization and its power within its industry. 2. Liquidity and company development - Why the liquidity of a firm is considered crucial especially in the growth stage of a company's development In order to understand the role of liquidity in the growth stage of a company development, it would be necessary to refer to the activities in which a company has to be involved during the specific phase. In accordance with Schmeisser, Clausen and Popp (2011), during its growth phase, a firm has to develop its activities covering the relevant costs; at this point, the following problem appears: the development of a company in its growth phase may be delayed due to a series of factors that cannot be easily controlled, such as the lack of capability of employees, failures in the communication of the organization with its customers or suppliers and so on (Schmeisser, Clausen and Popp, 2011). During the above period, the cash required for the completion of the firm’s projects can be increased while the profits achieved may be low, especially in the initial period of the firm’s growth. Therefore, the liquidity of the organization during the specific period may be low. In a different case, i.e. in case that the liquidity of the organization in its growth phase is high, it can be assumed that the prospects for the organization, in terms of its performance, are quite positive. Kapil (2011) notes that the level of liquidity of each organization should be periodically checked in order to ensure the status of the organization within its market. It is explained that for modern firms, liquidity reflects their ability to achieve their targets, no matter if they refer to the short or the long term. In the context of the above role, liquidity is described as an indicator of ‘the investments and assets of a firm that can be quickly converted to cash at any time or within one year’ (Kapil 2011, p.6). In the study of Arnold (2008) reference is made to the liquidity risk, which is described as the condition in which the organization is not able to retrieve the cash necessary for covering its liabilities. Moreover, Singla (2007) notes that in the growth sta

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