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what does liquidity mean in business

What Does Liquidity Mean in Business?

Liquidity can affect a business’s ability to carry out its operations by improving or restricting the ease at which it can secure cash. Businesses with strong liquidity will have an easier time securing cash to fund their operations than businesses with poor liquidity. So, what does liquidity mean in business and how does it work?

What Does Liquidity Mean in Business?

Liquidity Explained: What You Should Know

Liquidity is a measurement of a business’s ability to convert its assets into cash for the purpose of paying short-term liabilities. In other words, it shows how easily a business can turn its non-cash valuables into money so that it can pay its bills.

Nearly all businesses have financial liabilities. Whether it’s a loan, credit card, utility bills, etc., businesses are responsible for paying their financial liabilities. Using their immediate assets, however, businesses can typically cover these liabilities. Liquidity simply refers to a business’s ability to convert its assets into cash so that it can pay its short-term liabilities.

What are Assets?

Cash is generally considered a business asset, but it’s not taken into account when measuring liquidity. Instead, non-cash assets are factored into the equation, some of which may include the following:

  • Stocks
  • Bonds
  • Equipment
  • Inventory
  • Property
  • Accounts receivables

What is Liquidity Ratio?

Liquidity ratio is a formula used to calculate a business’s liquidity. Although there are several types of liquidity ratios, the two most common include current ratio and quick ratio.

The current ratio is calculated by taking a business’s assets and dividing them by its short-term liabilities. The quick ratio uses a similar formula, with the only exception being that it doesn’t account for the business’s inventory as part of its assets. Both current and quick ratio can provide business owners with a better understanding of their business’s liquidity.

The Importance of Liquidity

Liquidity is a key concept with which business owners should familiarize themselves. Businesses with poor liquidity often struggle to cover their short-term liabilities. Since they are unable to easily convert assets into cash, their bills may go unpaid.

Another reason businesses should measure liquidity is because it reveals their total short-term liabilities. Neglecting to monitor liabilities may result in increasing debt that continues to grow larger due to interest. Business owners can see their total short-term liabilities, however, by measuring their liquidity.

This article was brought to you by Intrepid Private Capital Group – A Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.

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Intrepid Private Capital Group • February 21, 2019

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