Liquidity
The ease with which assets can be converted to cash, and more broadly, a business's ability to meet short-term financial obligations.
Liquidity describes how quickly and easily an asset can be converted to cash without a material loss in value. Cash is perfectly liquid; property is relatively illiquid because selling takes time and incurs transaction costs. In a broader business context, liquidity refers to a business's capacity to meet its short-term obligations as they fall due.
Key liquidity metrics include the current ratio (current assets divided by current liabilities) and the quick ratio (current assets excluding stock, divided by current liabilities). A current ratio below 1 suggests a business may struggle to meet its near-term obligations from its existing current assets.
Liquidity risk - the risk of running out of cash - is one of the most critical risks facing UK SMEs. Invoice finance and revolving credit facilities are specifically designed to improve liquidity by releasing cash tied up in outstanding invoices or providing a flexible credit line. Maintaining adequate liquidity is a fundamental requirement for business sustainability.
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