The financial property that determines whether a business can survive the short term. Liquidity is what happens when profitability meets the calendar - whether the cash will be there when bills come due.
Definition
Liquidity - a business's ability to meet short-term obligations with cash or assets that can be quickly converted to cash. Measured via the current ratio and quick ratio.
Common uses
- Short-term health assessment - can the business survive the next 3-6 months?
- Lender evaluation - banks scrutinize liquidity ratios for credit decisions
- Operational risk management - liquidity buffers prevent forced bad decisions
Watch out
A profitable business with poor liquidity is more fragile than an unprofitable business with strong liquidity. Profit determines long-term survival; liquidity determines short-term survival.