Ideally, a company can be expected to focus on 2 principal objectives:
1. Future Profit: To provide an acceptable and continuing rate of return to investors.
2. Current Liquidity: To maintain an adequate level of financial resources to support current and planned future operations and growth.
Future Profit and Current Liquidity
A company can survive without profit as long as it has access to cash.
A profitable company with no cash faces difficulties.
No company can survive for more than a few days with neither profit nor cash.
Future Profit overrides Current Liquidity
A profitable company is less likely to fail than an unprofitable one.
The overriding factor in deciding whether to allow a company to continue in business is its profit potential, which is more important than its current liquidity.
A company with low liquidity and a high profit potential will almost certainly be helped to overcome what may be regarded as a temporary problem.
1. Future Profit: To provide an acceptable and continuing rate of return to investors.
2. Current Liquidity: To maintain an adequate level of financial resources to support current and planned future operations and growth.
Future Profit and Current Liquidity
A company can survive without profit as long as it has access to cash.
A profitable company with no cash faces difficulties.
No company can survive for more than a few days with neither profit nor cash.
Future Profit overrides Current Liquidity
A profitable company is less likely to fail than an unprofitable one.
The overriding factor in deciding whether to allow a company to continue in business is its profit potential, which is more important than its current liquidity.
A company with low liquidity and a high profit potential will almost certainly be helped to overcome what may be regarded as a temporary problem.
A highly liquid company with declining or no profit potential is unlikely to survive for long. Why should investors leave their funds to dwindle? The only decision facing such a company is
- whether to end operations immediately or
- to continue and see liquidity and profitability decline until matters are taken out of management's hands.
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