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Liquidity

November 3, 2015 • 2 min read

In economics, investment bankers and financial brokers use the term “liquidity” to describe how rapidly an asset can be sold off for cash. Liquidity can come in various forms, most notable assets include Treasury Bills and Publicly Traded Stock.

One can refer to liquidity as assets sold or traded within 24 hours for cash. When assets such as undeveloped real estate or commercial property cannot be sold off within 24 hours, it’s considered “illiquid.”

Illiquid assets are still considered financially viable assets, as long as they are sold without significant loss of value.

Why is liquidity considered important?

A lot of individuals and successful investors will use their liquid assets as their emergency savings. Because liquidity can be sold off relatively easily, and without hassle, it provides investors and individuals with a quick financial backing and emergency savings solution.

Assets versus Liquidity in Business

Businesses of any kind have access to financial savings and their assets. These assets can range in financial value. If a business or company needs to access their liquid assets to make payments or inject large cash flow into the business. Liquid assets can then easily and quickly be sold off.

Liquid Business Assets: These include accounts receivable, equivalents, and inventory of the business.
Non-liquid Assets: Assets that will take longer to sell off for cash include buildings, real estate or property, large equipment, and trademarks.

Why is liquidity important?

In business, liquidity can be used to track and measure the financial stability of the business. Liquidity is also considered important to help secure loans and create attainable goals for the business.

Overall, liquidity is a key indicator of the financial well-being of a business. It gives financial institutions a clearer picture if the business is able to make their loan repayments, and adhere to tax regulations.

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