What is liquidity in accounting?
Liquidity refers to a company’s ability to meet its short term financial obligations using its available assets. It measures how easily assets can convert into cash without significant loss in value.
Why is liquidity important?
Strong liquidity ensures that a business can pay its bills, salaries, and suppliers on time. Poor liquidity increases the risk of missed payments and financial distress.
How is liquidity measured?
Liquidity is measured using financial ratios such as the current ratio and quick ratio. These compare short term assets to short term liabilities.
What are examples of liquid assets?
Liquid assets include cash, bank balances, and short term investments. These assets can be accessed or converted quickly to meet obligations.
What happens if a business has low liquidity?
Low liquidity leads to cash flow issues, delayed payments, and increased reliance on borrowing. In severe cases, it can result in insolvency.