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Liquidity is the ability to have enough money or current assets when needed. Another definition of liquidity is the ability to have money to pay when you have to pay. but may have different meanings depending on the context of the speaker.
Liquidity risk is the risk of not being able to sell assets immediately when cash is needed. Or it might be a loss if you want to change it into cash. If the business view is that the business may not be able to meet its short-term financial needs, this mostly happens because securities or assets cannot be converted into cash.
As mentioned above, liquidity is the ability to have enough money or current assets when you need them. and in order to convert certain assets into cash means there must be some necessity to use cash. or there is a demand for some property to be converted to cash.
Imagine cash being the fuel or energy that will keep the company moving. When there is a lot of fuel, invest in order to get a profit back. However, if there is a crisis or someone sells or invests too much, the fuel is not enough to drive the company. Moving on would be difficult. Therefore, the company may have to sell some parts in exchange for fuel or cash. in order to drive the company further.
Liquidity or cash is very important when there is a crisis or economic risk. Therefore, we can see that in times of crisis, Risky assets have a lower value before other assets. Because investors want safety and enhance liquidity that may be a risk to yourself to prepare for future uncertainties as well
Ratios that represent the entity’s financial liquidity or ability to pay its debts in business operations, liquidity is important. If the business has good liquidity, it shows the ability to pay off short-term debts as well.
A ratio
Quick working capital ratio = Current assets – Inventories ÷ Current liabilities
ratio
If the ratio is above 1, the company has highly liquid assets. enough to pay current liabilities. The higher this ratio, the better. It represents a high level of liquidity for the company.
If the ratio is below 1, the company has few current assets. Therefore, having low liquidity means not having enough money to pay current liabilities. This value, if it is low, indicates that the company’s liquidity is low.
However, it’s not just companies that need liquidity. So do we. When in times of crisis, we have enough cash on hand to prepare for the unexpected. because at least we didn’t get the return. The important thing is that we are not damaged.
However, it’s not just companies that need liquidity. So do we. When in times of crisis, we have enough cash on hand to prepare for the unexpected. because at least we didn’t get the return. The important thing is that we are not damaged.
