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 Discussion question

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?

Post by Classmate

 

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)

References

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