Business liquidity definition
A company's liquidity refers to how easily its assets can be converted into cash. Some assets, such as current accounts or bonds, are highly liquid as they can be converted to cash in a matter of hours or days, while others, such as property or equipment that would need weeks or months to sell, are less easily convertible.
Business liquidity management is fundamental for companies as generating cash quickly allows them to not only face sudden cash deficits or pay unexpected bills or debts, but also to run their operations and potentially expand their business.
Many factors can influence the liquidity of a company. For example, overtrading – when you sell more than you can make or can afford to produce – could alter your liquidity if you don’t have sufficient resources. Losing one of your biggest customers could also have a massive impact as it would reduce your revenue. If you can’t convert your assets into cash quickly, you may struggle to pay your bills and you may become insolvent.
Test out various scenarios to go further and see how different external factors could impact your business liquidity.
All you need to do is to fill in or modify some of the fields to simulate the potential impacts of reduced turnover, losses, drops in sales, unpaid invoices or payment delays on your liquidity.
For example, ask yourself these questions:
Monitoring where and how money is spent is important when managing the liquidity of a company. Making can help your liquidity management and prevent you from having to look for emergency solutions to avoid financial distress.