finance
Liquidity
How easily the business can meet short-term obligations with cash or cash-equivalent assets.
Definition
Liquidity is the ability to pay short-term obligations as they come due. The most liquid asset is cash; receivables are next; inventory is less liquid; equipment and real estate are illiquid. Liquidity ratios: current ratio (current assets / current liabilities) and quick ratio (excluding inventory) measure short-term liquidity. A profitable business can still go bankrupt if it lacks liquidity - which is why cash flow management beats P&L management in tight moments.
In your business
- →Maintain 3-6 months of operating expenses in liquid cash
- →Watch the quick ratio - it strips out inventory and reveals true short-term safety
- →Liquidity matters most right before it disappears - build cushion before you need it