Liquidity is the ease of which an asset or security can be converted into cash, maintaining its market price.
Liquidity is all about how quickly you can convert your asset to cash.
For example: Cash is considered the most liquid asset. Securities such as stocks or bonds are generally considered liquid (depending on the individual security and performance at the time). Whereas property (fixed asset) can be considered as more illiquid, as it can take many months to complete a sale and convert the asset to cash.
Why should I care?
For individuals – liquidity determines your ability to pay your bills.
For companies – liquidity determines how easily a company can pay its short-term debts.
Liquidity is important to companies at current times, as those adversely affected by the coronavirus outbreak, may have short-term liabilities and debt obligations to meet.
Having liquid assets can mean a company is able to sell on their assets to meet their obligations. Liquidity for companies may be determined by its investments or accounts receivable.
A company’s liquidity ratio also plays an important role in influencing whether a potential creditor decides to lend funds.