Fresh Food Cloud Kitchens Pvt Ltd opened its cloud kitchen in Bangalore in Year 2020. The food items prepared and delivered by the company are liked by most on account of its ethnic taste and in the short time of 2 years

From the facts given in the question, it seems that the company was not able to have sufficient liquidity to run the business. The situation of the shortage of funds to meet the day-to day expenses is called as Liquidity Risk . The liquidity risk arises due to mismatches in the cash flow i.e., absence of adequate funds. Liquidity is different from solvency. A firm may be in a sound position as per the balance sheet, but if the current assets are not in the form of cash or near cash assets, the firm may not be in a position to make payment to its creditors which adversely affects the reputation of the firm. The liquidity risk may be of two types, trading risk and funding risk. Trading Risk It may mean the absence of the liquidity or enough products or securities etc. to actually undertake buying and selling activities. e.g., in the context of securities trading inability to enter into derivative transactions with counter parties or make sales or purchase of securities. Funding Risk It refers to the inability to meet the obligations e.g., inability to manage funds by either borrowing or the sale of assets/securities. It arises where the balance sheet of a firm contains illiquid financial assets which cannot be turned in to cash within a very short time. Measures to mitigate the risk In the given case the company has deployed its funds in purchasing business places at various locations in Bangalore. This involves the heavy cash out flow. Whatever the retained earning the company had earned in previous years, from its first kitchen, were expended in opening of the new kitchens, which was a wrong decision. Instead of this the company could place to have the place of business on rent. Though the Balance Sheet seems to be solvent and the business was profitable, but once the trade cycle of inflow and outflow of funds are mismatched, the business suffers a lot. Some other ways to mitigate liquidity risk includes Develop accurate cash flow forecasts Have policies and guidelines in place for decision-making regarding the allocation of cash Effective receivables management Prevent operational risks Frequent analyses Use predictive analytics