Liquidity: An Alternative Model

Abstract

There are at least two approaches to determine the liquidity position of business organisations – the traditional and liquidity ratio models. The traditional approach of measuring corporate/institutional financial liquidity is taught in college accounting and business classes and is used by practitioners. The limitations of this model may not have been well understood. This paper reviews the existing approaches and presents an alternative model for the determination of the liquidity position of business enterprises. The proposed alternative liquidity ratio model takes into consideration elements that are not incorporated in the existing approaches. This new alternative model will provide more accurate information regarding the financial liquidity of an organisation. It may help management to make better decisions at the operational as well as the strategic financial decision levels.