{"id":2232,"date":"2019-09-12T17:42:00","date_gmt":"2019-09-12T17:42:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=2232"},"modified":"2026-03-31T15:38:50","modified_gmt":"2026-03-31T15:38:50","slug":"primary-secondary-sources-liquidity","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/primary-secondary-sources-liquidity\/","title":{"rendered":"Primary and Secondary Sources of Liquidity"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Working Capital Management (2021 Level I CFA\u00ae Exam \u2013 Reading 35)\",\n  \"description\": \"This video lesson covers working capital management, focusing on managing cash, accounts receivable, and inventory to maximise shareholder wealth. It explains liquidity sources, liquidity measurement, cash conversion cycles, and short-term funding strategies. The video also emphasises evaluating funding methods and managing short-term investments efficiently.\",\n  \"uploadDate\": \"2018-10-25T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/7ODf4zqxNxo\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/youtu.be\/7ODf4zqxNxo\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/7ODf4zqxNxo\",\n  \"duration\": \"PT19M42S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following are primary sources of liquidity?\",\n    \"text\": \"Which of the following are primary sources of liquidity?\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Ready cash balances and short-term funds.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Negotiating debt contracts and liquidating assets.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Filing for bankruptcy and cash flow management.\"\n      }\n    ]\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\"\n  width=\"611\"\n  height=\"344\"\n  src=\"https:\/\/www.youtube.com\/embed\/7ODf4zqxNxo\"\n  title=\"YouTube video player\"\n  frameborder=\"0\"\n  allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\"\n  referrerpolicy=\"strict-origin-when-cross-origin\"\n  allowfullscreen>\n<\/iframe>\n\n\n<p>Liquidity management describes a company\u2019s ability to generate cash when needed to meet its short-term obligations.<\/p>\n<p>Effective liquidity management means that a company can manage its major sources of liquidity efficiently. Although these major sources tend to vary from one company to another, they typically include primary sources of liquidity and secondary sources of liquidity.<\/p>\n<div style=\"margin: 20px 0;\"><a style=\"display: block; width: 100%; text-align: center; padding: 10px; border: 2px solid #2f5bea; border-radius: 40px; font-size: 16px; color: #2f5bea; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Practice liquidity management questions with our free trial. <\/a><\/div>\n<h2><strong>Primary Sources of Liquidity<\/strong><\/h2>\n<p>Primary sources of liquidity refer to funds that are readily accessible to a company at a relatively low cost. They can be held as cash or cash equivalents, and include:<\/p>\n<ul>\n<li>Cash available in bank accounts;<\/li>\n<li>Short-term funds, such as lines of credit and trade credit; and<\/li>\n<li>Cash flow management.<\/li>\n<\/ul>\n<h2><strong>Secondary Sources of Liquidity<\/strong><\/h2>\n<p>Secondary sources of liquidity include:<\/p>\n<ul>\n<li>Negotiating debt contracts to reduce the burdens of high-interest payments or principal repayment;<\/li>\n<li>Liquidating assets; and<\/li>\n<li>Filing for bankruptcy protection and reorganization.<\/li>\n<\/ul>\n<p>Using secondary sources of liquidity can impact a company\u2019s financial and operating positions unlike primary sources of liquidity which usually have no such impact. Using secondary sources of liquidity can also signal that a company\u2019s financial health is worsening and lead to liquidity being provided at a higher cost than usual.<\/p>\n<h2><strong>Factors that Impact a Company\u2019s Liquidity Position<\/strong><\/h2>\n<p>The timing of cash receipts and disbursements can significantly affect a company\u2019s liquidity position.<\/p>\n<p>When receipts occur infrequently, especially after payments are made, a \u2018drag on liquidity\u2019 occurs due to the decreased availability of funds. Drags on liquidity include:<\/p>\n<ul>\n<li>Uncollected receivables;<\/li>\n<li>Obsolete inventory; and<\/li>\n<li>Tight credit.<\/li>\n<\/ul>\n<p>Additionally, when disbursements are paid too early, a \u2018pull-on liquidity\u2019 occurs because companies will be forced to spend money before receiving funds from sales that could cover their obligations. Pulls on liquidity include:<\/p>\n<ul>\n<li>Making payments early;<\/li>\n<li>Reduced credit limits;<\/li>\n<li>Limits on short-term lines of credit; and<\/li>\n<li>Low liquidity positions.<\/li>\n<\/ul>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which of the following are primary sources of liquidity?<\/p>\n<p>A. Negotiating debt contracts and liquidating assets<\/p>\n<p>B. Ready cash balances and short-term funds<\/p>\n<p>C. Filing for bankruptcy and cash flow management<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is B.<\/p>\n<p>Readily available cash balances and short-term funds are examples or primary sources of liquidity.<\/p>\n<p>Option A is incorrect. Negotiating debt contracts and liquidating assets are examples or secondary sources of liquidity.<\/p>\n<p>Option C is incorrect. Whereas cash flow management is a primary source of liquidity, filing bankruptcy is a secondary source of liquidity.<\/p>\n<\/blockquote>\n<p><em>Reading 35 LOS 35a:<\/em><\/p>\n<p><em>Describe primary and secondary sources of liquidity and factors that influence a company\u2019s liquidity position<\/em><\/p>\n<div class=\"notes_inv\"><hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-finance\/learning-sessions-curriculum-corporate-finance\/\"><em>Corporate Finance &#8211; Learning Sessions<\/em><\/a><\/p>\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"background: #1a73e8; color: #ffffff; padding: 14px 26px; border-radius: 999px; text-decoration: none; font-weight: bold; font-size: 16px; display: inline-block;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a>\n<p style=\"margin-top: 10px; font-size: 14px; color: #555;\">Access CFA Level I practice questions, video lessons, and study notes covering liquidity management, working capital analysis, and corporate finance decision-making.<\/p>\n<\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Liquidity management describes a company\u2019s ability to generate cash when needed to meet its short-term obligations. Effective liquidity management means that a company can manage its major sources of liquidity efficiently. Although these major sources tend to vary from one&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6],"tags":[],"class_list":["post-2232","post","type-post","status-publish","format-standard","hentry","category-corporate-finance","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Primary &amp; Secondary Liquidity Sources | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Primary liquidity sources include cash and marketable securities, while secondary sources involve credit lines or asset sales to meet short-term obligations.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link 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