1. One of the key reasons that businesses fail is due to improper capital planning and a general lack of working capital (aka liquidity). It also happens to be one of the key reasons why people fail too. In personal finance, we know that you should have 3 to 6 months’ worth of money set aside for emergencies, but what does it take to make sure that a business is properly liquid?
2. As a society the US has one of the lowest savings rates in all of the developed countries. Why do we have such a hard time saving money?
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It can be difficult for businesses to maintain the proper amount of liquidity. Many factors affect a business’s ability to gain, retain, and maintain the proper amount of liquidity to meet its goals. There are many outside entities such as investors, stockholders, and creditors which are applicable factors as well. Liquidity is understood in terms of the amount of difficulty required, or the lack thereof, to convert an asset or security into cash without altering its market price. The core of liquidity is cash and the rest of liquidity is that which can be converted into cash. It takes money to make money so if a business was prioritizing maintaining the proper amount of liquidity then it would probably be important to not overextend its short-term obligations since liquidity is measured in terms of a company’s ability to cover its short-term obligations. This is related to the use of the Current Ratio to show how much ability that company has to turn its assets into cash within one year. I understand that as the process of a company needing startup cash, then a need to produce income while minimizing expenses, and additionally being cautious not to over-commit so as not to overburden the liquidity of the company. If a company does not have strong enough liquidity, then it is not viable and could be unstable if unforeseen burdens occur. (Hayes, 2021)
Some would say too many Americans live lives of gluttony and excess with more money going out than money coming in. Historically America is post-agricultural and post-industrial. If there’s less money in the corporate account, Industry is shrinking, Government is growing, taxes go up every year, and the dollar is worth less every year, then that is all going to trickle down too many people having less income. Progressive liberal socialist would say that the citizen is not responsible for their lack of income and excess of debt but rather that they are victims of their environment and they simply need the alleged magical working wage. Remember when parents used to say money doesn’t grow on trees? It seems like we’re talking about the same thing. (Meyer, 2000)
Why does the society of the US have one of the lowest savings rates in all of the developed countries? This seems more like a psychology/lifestyle choice question. Why do people buy clothes that are unnecessary and that they cannot afford? The answer, because they want to. Why do people buy homes, cars, and boats that they can’t afford? Why don’t they spend that money on their children’s education? The answer, because they want to. According to C
hris Carroll, from MIT, and Lawrence Summers, from Harvard, a majority of the decline in money being put into savings accounts can be traced back to a decline in the personal savings rate. Using that logic, the reason would be that Americans lost motivation to put money in their savings account because of the lack of return. But there are many ways to save. Money saved in a mattress is still more money than none saved at all, or better yet, more money saved than money over-committed to debt. (Carroll, 1987)
Carroll, C., Summers, L. (1987). Why is U.S. National Saving so Low? Brookings. Retrieved from https://www.brookings.edu/bpea-articles/why-is-u-s-national-saving-so-low/
Hayes, A. (2021). Investopedia. Liquidity. Retrieved from https://www.investopedia.com/terms/l/liquidity.asp (Links to an external site.)
Meyer, J. (2000). The Role Of Industrial And Post-Industrial Cities In Economic Development. Joint Center for Housing Studies of Harvard University. Retrieved from https://www.jchs.harvard.edu/research-areas/working-papers/role-industrial-and-post-industrial-cities-economic-development