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In this essay, I would like to analyze the possible alternatives open to a medium sized components manufacturer who is facing a liquidity crisis to solve its problem.

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Introduction

Business Part Liquidity is the amount of cash or the assets that can be easily turned to cash. Having insufficient liquidity means the firm could not pay its bills on time. In this case, it may be unable to develop itself, even unable to survive. In this essay, I would like to analyze the possible alternatives open to a medium sized components manufacturer who is facing a liquidity crisis to solve its problem. Firstly, the firm needs to solve the problems inside it, especially in its production. Liquidity problem might be caused by poor management of stock such as ordering too many materials and producing too many products. So the firm could reduce its production when its stock is still sufficient to sell. Through this way, it can cut the cost of the production. But, the problem is some workers might be fired if reducing the production, and the firm needs to pay them redundancy costs. It would make the situation even worse. ...read more.

Middle

The interest of a short-term loan is much lower than an overdraft, but, in another hand, it is much more difficult to get. These two solutions might not be much useful because they are both short-term, the firm might not solve its problem before they are due. And the long-term loan is better with an even lower interest. Besides, not all the business can loan from the bank. It is much easier for the public limited company rather than sole trader or partnership. Secondly, the track record of its success is very important because a good record could make the bank confident to lend the firm money. Also, it is very difficult for the firm to borrow money from the bank when the economy is in a recession. To borrow money from the bank, the firm has to make a cash flow forecast which shows its future development and would make the bank confident to lend it money. ...read more.

Conclusion

Liquidity problem is dangerous to the firm because it will force the business to fail if the firm cannot pay the bills on time, so the firm could negotiate with their suppliers about longer credit of its payment. This would work to some extent, but it would be detrimental if its credit reputation becomes low. The suppliers may stop selling it materials, which would make its production suspending. Also, there are some other possible alternatives open to the firm. It could sell some assets to get money and cut its purchases to retain cash. But these would cut down its productivity and make it unable to develop in a period of time. To conclude briefly, applying for a long-term loan from the bank should be the best possible alternative for the firm to solve the liquidity problem. Managing debts, applying short-term loan and overdraft and negotiating delaying payment are considerable. Such ways as selling assets or reducing purchases are rather detrimental for its further development, but it should know that survival is its basic objective, if it fails in the ideal solutions, it has to do so. ...read more.

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