What is Liquidity & why is it important for your business?

When discussing how well your company's finances are doing, the word "liquidity" is frequently used. However, what exactly is liquidity, why is it crucial for your company, and how will your cash flow impact it?

What is meant by liquidity?

Liquidity is the amount you could use from your present assets to pay down your existing creditors. Rent, bank loans, utility bills, and other comparable debts may count as these liabilities. Typically, the phrase "liquidity" refers to the liabilities and assets for a brief, one-year time. You should be able to pay off your liabilities with ease using the current assets you have in order to have adequate liquidity.

Cash is the most liquid asset as this could be used to pay off debts quickly. Similarly, stocks and bonds could be converted to cash fast. However, it would take longer to convert other assets, such machinery, to their market value in cash. Consider this before investing in some assets because they might not hold their full cash value over time.

Why is liquidity important?

Good liquidity in your company might help you establish good credit and qualify for business loans. Additionally, it will enable you to make wise financial decisions, plan for the future of your company, and make strategic investments.

On the other hand, if you have bad liquidity then you could struggle to pay your bills and meet the financial demands of your business.

How does liquidity impact cash flow?

You may assess your company's liquidity by keeping a watch on your cash flow. Knowing how healthy your cash flow is will help you maintain positive liquidity since cash is your most liquid asset. Cash flow refers to the movement of money into and out of a firm. Tips on improving cash flow will be discussed in the next article.