Liquidity is a term often used in finance, but why is it so important? Liquidity refers to the extent to which assets can be quickly and easily converted into cash without significant loss of value. It is the availability of sufficient cash to meet financial obligations when needed. Read on to find out why liquidity is important.
Financial flexibility
Liquidity provides financial flexibility. Having enough cash or easily tradable assets allows individuals and companies to respond quickly to unexpected expenses, emergencies or business opportunities. It allows them to balance their finances without being forced to sell long-term assets on unfavourable terms.
Avoiding debt
By having sufficient cash, individuals and businesses can cope with unexpected expenses or financial setbacks without resorting to taking on debt. Avoiding debt helps minimise interest costs and maintain financial health.
Payment of bills and obligations
Liquidity is essential to meet bills and obligations on time. Having enough cash or liquid assets ensures that you can make your rent, mortgage, utilities and other important payments without defaulting. For businesses, it is important to pay suppliers, employees and other business obligations on time to maintain a good reputation.
Capital for growth and investment
For businesses, liquidity is vital to enable growth and investment. Having sufficient cash enables companies to purchase new equipment, increase inventory, finance marketing campaigns or enter new markets. Lack of cash can hinder growth plans and miss market opportunities. It can stop investors from investing in your business. Or cause problems if you want to use forms of financing such as factoring.
