Liquidity decisions vs Dividend decisions

The following are those decision details


Liquidity decision:

The liquidity decision is concerned with the management of the current assets, which is a pre-requisite to long-term success of any business firm. This is also called as working capital decision.

The main objective of the current assets management is the trade-off between profitability and liquidity, and there is a conflict between these two concepts.

If a firm does not have adequate working capital, it may become illiquid and consequently fail to meet its current obligations thus inviting the risk of bankruptcy.

On the contrary, if the current assets are too enormous, the profitability is adversely affected. Hence, the major objective of the liquidity decision is to ensure a trade-off between profitability and liquidity.

Besides, the funds should be invested optimally in the individual current assets to avoid inadequacy or excessive locking up of funds. Thus, the liquidity decision should balance the basic two ingredients, i.e. working capital management and the efficient allocation of funds on the individual current assets.

The important elements of liquidity decisions are:

  • Formulation of inventory policy
  • Policies on receivable management
  • Formulation of cash management strategies
  • Policies on utilisation of spontaneous finance effectively


Dividend decisions:

Dividend is that portion of profits of a company which is distributed among its shareholders according to the resolution passed in the meeting of the Board of Directors.

The dividend decision is always a problem before the top management or the Board of Directors as they have to decide how much profits should be transferred to reserve funds to meet any unforeseen contingencies and how much should be distributed to the shareholders.

Payment of dividend is always desirable since it affects the goodwill of the concern in the market on the one hand, and on the other, shareholders invest their funds in the company in a hope of getting a reasonable return.

Retained earnings are the sources of internal finance for financing of corporate’s future projects but payment of dividend constitute an outflow of cash to shareholders.

Dividend policy influences the dividend yield on shares. Dividend yield is an important determinant of an investor’s attitude towards the security (stock) in his portfolio management decisions.

The following issues need adequate consideration in deciding on dividend policy:

  • Preferences of shareholders
  • Current financial requirements of the company.
  • Legal constraints on paying dividends.
  • Striking an optimum balance between desire of shareholders and the company’s funds requirements.

Sarav Author


  • Damien Schettler

    (August 14, 2023 - 10:04 pm)

    Hello. impressive job.

  • Rocco Wilshusen

    (October 24, 2023 - 2:26 am)

    With thanks! Valuable information!

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