Liquidity refers to a company’s ability to meet its short-term financial obligations using its available assets. In simple terms, it measures how quickly and easily a business can convert its assets into cash without significant loss of value. Liquidity is crucial for maintaining daily operations, paying suppliers, covering payroll, and responding to unexpected expenses.

The most liquid asset is cash, followed by cash equivalents, accounts receivable, and short-term investments. Assets like real estate or machinery are less liquid because they take longer to sell and may not convert to cash quickly.

Common metrics used to assess liquidity include:

• Current Ratio: Current Assets ÷ Current Liabilities

• Quick Ratio: (Current Assets – Inventory) ÷ Current Liabilities

• Cash Ratio: Cash and Equivalents ÷ Current Liabilities

A higher ratio indicates stronger liquidity and a better ability to meet short-term obligations. Poor liquidity, on the other hand, can lead to cash flow problems, missed payments, and even insolvency.

Liquidity is essential not only for financial stability but also for building trust with investors, lenders, and suppliers. In summary, liquidity reflects a company’s financial flexibility and resilience, allowing it to operate smoothly and respond effectively to both opportunities and risks.