
Liquidity for a small business means the ability to cover its short-term financial obligations. It refers to the ease with which the assets can be converted to cash.
By calculating and tracking different ratios of your company’s assets and liabilities, you can measure your business’ liquidity. This is necessary for spotting cash flow problems and checking if your business is in good financial health.
What this article covers:
What Is Liquidity in Accounting?
What Is Liquidity Ratio?
Why Is Liquidity Important?
How Can Liquidity Be Improved?
What Is Liquidity in Accounting?
What Are Examples of Liquidity?
What Is Liquidity Ratio?
Current Ratio
Current ratio = current assets / current liabilities
Quick Ratio
Cash Ratio
Cash ratio = (cash + cash equivalents) / current liabilities
Creditors and investors use the liquidity ratio to gauge how well a business is performing.
Why Is Liquidity Important?
Here are some reasons why liquidity is important for small businesses.
How Can Liquidity Be Improved?
To maximize liquidity and maintain a positive cash flow, you can take the following steps.