{"id":30131,"date":"2021-09-13T14:06:55","date_gmt":"2021-09-13T14:06:55","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=30131"},"modified":"2025-04-04T10:03:11","modified_gmt":"2025-04-04T10:03:11","slug":"primary-and-secondary-sources-of-liquidity-and-liquidity-position","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/corporate-issuers\/primary-and-secondary-sources-of-liquidity-and-liquidity-position\/","title":{"rendered":"Primary and Secondary Sources of Liquidity"},"content":{"rendered":"\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/9XarNMLDyXM\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p><span data-preserver-spaces=\"true\">Liquidity management describes a company\u2019s ability to generate cash when needed to meet its short-term <\/span><span data-preserver-spaces=\"true\">obligations. <\/span><span data-preserver-spaces=\"true\">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 and secondary sources of liquidity.<\/span><\/p>\n<h2><strong><span data-preserver-spaces=\"true\">Primary Sources of Liquidity<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">Primary sources of liquidity refer to funds that are readily accessible to a company at a relatively <\/span><span data-preserver-spaces=\"true\">low cost. They can be held as cash or cash equivalents and include:<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">Cash available in bank accounts;<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Short-term funds, such as lines of credit and trade credit; and<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Cash flow management.<\/span><\/li>\n<\/ul>\n<h2><strong><span data-preserver-spaces=\"true\">Secondary Sources of Liquidity<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">Secondary sources of liquidity include:<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">Negotiating debt contracts to reduce the burdens of high-interest; payments or principal repayment;\u00a0<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Liquidating assets; and<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Filing for bankruptcy protection and reorganization.<\/span><\/li>\n<\/ul>\n<p><span data-preserver-spaces=\"true\">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.<\/span><\/p>\n<h2><strong><span data-preserver-spaces=\"true\">Factors that Impact a Company\u2019s Liquidity Position<\/span><\/strong><\/h2>\n<p><span data-preserver-spaces=\"true\">The timing of cash receipts and disbursements can significantly affect a company\u2019s liquidity position. <\/span><span data-preserver-spaces=\"true\">When receipts infrequently occur, especially after payments are made, a \u2018drag on liquidity\u2019 occurs <\/span><span data-preserver-spaces=\"true\">due to the decreased availability of funds. Drags on liquidity include:<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">Uncollected receivables;<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Obsolete inventory; and<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Tight credit.<\/span><\/li>\n<\/ul>\n<p><span data-preserver-spaces=\"true\">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:<\/span><\/p>\n<ul>\n<li><span data-preserver-spaces=\"true\">Making payments early;<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Reduced credit limits;<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Limits on short-term lines of credit; and<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Low liquidity positions.<\/span><\/li>\n<\/ul>\n<blockquote>\n<h2>Question<\/h2>\n<p><span data-preserver-spaces=\"true\">Which of the following are\u00a0<\/span><em><span data-preserver-spaces=\"true\">most likely<\/span><\/em><span data-preserver-spaces=\"true\">\u00a0primary sources of liquidity?<\/span><\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li><span data-preserver-spaces=\"true\">Negotiating debt contracts and liquidating assets.<\/span><\/li>\n<li><span style=\"color: initial;\">Ready cash balances and short-term funds.<\/span><\/li>\n<li><span data-preserver-spaces=\"true\">Filing for bankruptcy and cash flow management.<\/span><\/li>\n<\/ol>\n<p><strong><span data-preserver-spaces=\"true\">Solution<\/span><\/strong><\/p>\n<p>The correct answer is<strong><span data-preserver-spaces=\"true\"> B.<\/span><\/strong><\/p>\n<p><span data-preserver-spaces=\"true\">Readily available cash balances and short-term funds are examples or primary sources of <\/span><span data-preserver-spaces=\"true\">liquidity.<\/span><\/p>\n<p><strong><span data-preserver-spaces=\"true\">A is incorrect.<\/span><\/strong><span data-preserver-spaces=\"true\"> Negotiating debt contracts and liquidating assets are examples or\u00a0<\/span><span data-preserver-spaces=\"true\">secondary sources of liquidity.<\/span><\/p>\n<p><strong><span data-preserver-spaces=\"true\">C is incorrect.<\/span><\/strong><span data-preserver-spaces=\"true\"> Whereas cash flow management is a primary source of liquidity,\u00a0<\/span><span data-preserver-spaces=\"true\">filing bankruptcy is a secondary source of liquidity.<\/span><\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr \/>\n<p>\u00a0<\/p>\n<\/div>\n\n\n","protected":false},"excerpt":{"rendered":"","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[25],"tags":[],"class_list":["post-30131","post","type-post","status-publish","format-standard","hentry","category-corporate-issuers","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 Sources of Liquidity | CFA\u00ae Notes<\/title>\n<meta name=\"description\" content=\"Understand primary and secondary sources of liquidity. 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