The term liquidity refers to the ease with which an asset can be converted into cash.

An individual or company is liquid if their assets can be converted to cash easily. Of all kinds of assets money, whether cash on hand or in a savings account, is obviously the most liquid. On the other hand, assets like automobiles and real property are considered to be non-liquid since they cannot be easily converted to cash without a significant loss in its value.

Liquidity is one of the indicators of a business’s health. It is important for a business to remain liquid to have enough money for regular operating expenses, as well as tide it over in case of unforeseen problems.

For example, if a business is not liquid and a new competitor arrives with better facilities and marketing strategies, then the business can suffer a huge loss. However, if the business is liquid it can upgrade its own facilities and pour more money into marketing to stay competitive.

Furthermore, if a business is not liquid enough to even cover monthly operating expenses, then that business is in big trouble–unless it gets more investors or takes out a loan. Investors will likely decline and loans may balloon if liquidity problems continue. This could lead to insolvency and eventually to bankruptcy.

Reviewed by Ryan Hammill