Liquidity vs. Profitability

in LeoFinance6 months ago

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To run your business, you need liquid money. If you keep a lot of liquid money, you miss the investment opportunity. You can invest and get returns from your investment.

Liquidity vs. Profitability.png

On the other hand, if you invest too much, you might have liquidity crisis in your business. Many business fail because of a liquidity crisis. There is a reverse relationship between profitability and liquidity.

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A liquidity crisis is the most common reason for businesses to fail.

Also people generally don't really account for risk. All is based on a prefect growth curve and achieving the often very challenging goals.

A crisis like the current covid-19 crisis will cause many businesses to fail. So far they have managed to keep running by increasing debt.

But now the reports of even big corporations restructuring and firing thousands of people are starting to come in.

And the first banks are showing they are in trouble too. The biggest hit though will come when both banks and businesses will have to present their year report over 2020 in the spring of 2021.

To run ongoing operations and meet the demand, you need to have liquidity. Having a balance between investment and liquid cash is very important. A business faces a lot of problems if there is an imbalance.

Due to Convid-19, many people lost their lives. It also negatively affects the economy. If this continues like this, we might see an economic crisis.

Thank you @invest4free for your comment!

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Very true!

Shared on Twitter.

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