Liquidity: Definition and Meaning

Definition

Liquidity is a company’s ability to meet short-term obligations as they come due.

Why It Matters

Liquidity depends on more than the amount of cash on hand. It is affected by the timing and quality of customer collections, vendor obligations, payroll, taxes, inventory, debt payments, available credit, and project billing.

Strong liquidity can give a business flexibility to manage normal operating needs and unexpected events. Liquidity concerns should be addressed proactively through realistic cash-flow forecasting and regular review.

Example

A business with available cash, collectible receivables, and manageable near-term obligations may have stronger liquidity than one with large overdue receivables and upcoming debt payments.

Related Terms

About TYS
TYS provides accounting, tax, construction-accounting, and business-advisory support to closely held businesses, contractors, individuals, and families. With offices in Fairport, New York, and Walnut Creek, California, TYS helps clients better understand their financial information and prepare for important decisions.

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The information on this page is provided for general educational purposes only and is not accounting, tax, legal, financial, insurance, bonding, or business advice. Consult qualified professionals regarding your particular circumstances.

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