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Definition
Liquidity is how easily a business can meet its short-term obligations — how much cash and near-cash it has relative to the bills falling due. A liquid business can pay its way comfortably; an illiquid one may struggle even if it is profitable and asset-rich.
In plain terms
Cash is perfectly liquid; a debtor due next week is highly liquid; specialist stock or property is not. Liquidity is about having the right assets in the right form at the right time, not just being worth a lot on paper.
Why it matters
Liquidity, not profitability, is what keeps a business trading day to day. Managing it is the whole purpose of cash flow discipline. See illiquid and solvency.
Related reading
Illiquid
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Solvency
Solvency is whether a business's total assets exceed its total liabilities — whether it could, in principle,…
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Cash position
A business's cash position is the amount of cash and readily available funds it holds at a given moment — its…
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Liquidity
Liquidity is how readily a business can convert assets into cash to meet its short-term obligations — the…
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