Liquidity Gap

It is measured as the difference between the assets and the liabilities of a company. This gap is calculated when the assets of the firms have different properties as compared to the liabilities of the firm. Liquidity Gap can be calculated as positive or negative as it depends upon the amount of assets and the liabilities of the firm. For example this gap is positive if a firm has more assets as compared to liabilities and is negative if the firm has more liabilities as compared to its assets.

Liquidity Gap is different for different organizations. For example for banks the liquidity gap occurs when there are a large number of deposits or a large amount is withdrawn from the bank. For most of the organizations and firms liquidity gap is not an indicator of a long term financial position instead it shows a quick snap shot of the firm’s present financial condition that may change with the course of time. In order to find out the gap of a specific period of time or a financial period a firm needs to calculate marginal gap for that period. In other words liquidity gap can also be defined as the net liquid assets of a company. This can also be defined as a gap of liquid assets and the volatile liabilities of a firm. The companies with some negative liquid gap must pay attention to their cash balance and also try to find out why unexpected change occur in the value of their cash balance.

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