Question 73

Focus on restoring liquidity through inventory and credit strategies

A company facing a low current ratio should prioritize restoring its liquidity, which can be effectively achieved by managing inventory levels and optimizing credit strategies.

A) Increase its dividend payouts to shareholders immediately

Increasing dividend payouts would further strain the company's cash flow and liquidity, making it an inappropriate response to a low current ratio. This action could exacerbate financial difficulties rather than alleviate them.

B) Enhance its brand image through extensive marketing campaigns

While enhancing brand image can be beneficial for long-term growth, it does not address the immediate liquidity issues indicated by a low current ratio. Marketing campaigns require financial resources that the company may not have, thus diverting attention from critical liquidity restoration.

C) Invest heavily in long-term capital asset acquisitions

Investing in long-term capital assets would likely require substantial cash outflows, which could worsen the company's liquidity position. A low current ratio signals that the company should conserve cash rather than engage in significant capital expenditures.

D) Focus on restoring liquidity through inventory and credit strategies

Restoring liquidity through inventory management and optimizing credit terms directly addresses the issue of a low current ratio. By improving cash flow and ensuring that short-term obligations can be met, the company can enhance its financial stability.

Conclusion

The correct answer, focusing on restoring liquidity through inventory and credit strategies, is essential for addressing a low current ratio effectively. Other options either worsen the liquidity situation or fail to resolve the underlying issues, making them unsuitable responses in this context. Prioritizing liquidity is crucial for the company's financial health and operational viability.