Describe the relationship between the firm's cash management program and the firm's risk of insolvency

What will be an ideal response?

The term insolvency describes the situation in which the firm is unable to meet its maturing liabilities on time. In such
a case, the company is technically insolvent in that it lacks the necessary liquidity to make prompt payment on its
current debt obligations. A firm could avoid this problem by carrying large cash balances to pay the bills that come
due. The financial manager must strike an acceptable balance between holding too much cash and too little cash. This
is the focal point of the risk-return trade-off. A large cash investment minimizes the chances of insolvency, but it
penalizes the company's profitability. A small cash investment frees up excess balances for investment in both
marketable securities and longer-lived assets; this enhances profitability and the value of the firm's common shares,
but it also increases the chances of the firm running out of cash.