7

The operating cash cycle

This chapter reviews:

  • The concept of corporate liquidity
  • The cash cycle
  • Matching short-term and long-term liquidity

Corporate liquidity

A company must maintain sufficient cash resources to pay all legitimate bills as they arise. A company that cannot do so has run out of liquidity and is in a very serious financial condition. Ironically, this is so even if it is currently generating good profits.

Cash in this case can be a bank account with a positive balance, or it can be a loan facility that the company has authority to draw down.

When cash runs out, the company’s management has lost the power to make independent decisions. An outside agency, such as an unpaid creditor or a bank whose loan is in default, will often ...

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