Multiple choice

When creditors' velocity or creditors' turnover is higher as compared to debtors' velocity, it would

  1. improve liquidity

  2. reduce liquidity

  3. have no effect on liquidity

  4. improve financial position

Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Creditors velocity and debtors velocity are opposing liquidity forces: one increases working capital while the other decreases it. When these velocities are similar in magnitude, they offset each other, resulting in no net effect on overall liquidity position.