Which principle ensures that a firm has sufficient liquidity to meet its short-term obligations?

The principle of cash flow management is crucial for ensuring that a firm has sufficient liquidity to meet its short-term obligations. Good cash flow management involves monitoring and analyzing the inflow and outflow of cash within a business to ensure that there is enough cash available to cover liabilities as they come due. This includes managing receivables, payables, and short-term investments effectively.

By keeping a close eye on cash flow, a company can predict cash needs, avoid shortages, and make informed decisions about spending and investment. It helps in assessing the timing of cash inflows versus cash outflows, which is essential for maintaining liquidity and operational continuity. Without sound cash flow management, even a profitable business could face financial difficulties if it does not have sufficient liquid assets to cover immediate obligations.

Other principles, like financial stability, capital structure, and operational efficiency, while important for overall business health and strategic decision-making, do not specifically focus on the management of cash resources needed for short-term obligations. Financial stability relates more to the overall financial health of a company, capital structure focuses on the long-term financing mix, and operational efficiency emphasizes maximizing output with minimal resource use, rather than addressing short-term liquidity directly.