In the business world, the financial status of any business is the reflection of the effectiveness of business financial decisions and also an indicator of interest to business stakeholders such as lenders, banks investors, and others. The availability of necessary and sufficient funds in short-term and long-term investments is a prerequisite for maintaining financial stability and preventing the business from insolvency. To prevent bankruptcy business liquidity must be duly revered.
Business liquidity is simply the ability of a company to quickly convert its assets into cash to meet short-term obligations or pay bills. It is the ease at which a company meets its short-term financial needs such as short-term liabilities, payment of bills, or taking up investment opportunities. Maintaining adequate liquidity is very essential as it helps businesses to maintain a strong cash position required for meeting financial obligations.
Business liquidity is very crucial to businesses in the following ways
1. Timely settlement of debt
Availability of sufficient and necessary amounts in current assets helps to navigate cash on time to the settlement of current liabilities. A business of high liquidity has a chance of utilizing investment opportunities once they arise or meeting urgent financial needs without delay.
2. Financial stability.
Meeting business short-term financial obligations is crucial for building financial stability. Low liquidity can make it difficult for a company to take advantage of opportunities for growth and expansion. Adequate liquidity helps businesses weather any unexpected challenges or downturns.
3. Solvency of business
Business solvency is the ability of a business to pay its debt; long-time and short-term debt. By having a high level of liquidity, a business will have funds available to pay debt when they are due. Business liquidity can also help the business meet its other financial needs such as payroll and rent which can also help to achieve solvency.
4. Creditworthiness
High liquidity in a business helps to build creditors’ and lenders’ trust. Business has a higher chance of getting credit if the lenders or creditors know that the business can settle the debt as of the due date. Credit when properly managed can help to expand the business.
5. It attracts customers.
Financial stability which is a result of liquidity serves as one of the indexes with which investors make decisions about where to invest their money. A business with high liquidity will have a high potential to take advantage of investment opportunities and this can attract investors.
Business liquidity is a major function of a finance manager and having adequate liquidity in a business is very crucial for growth and sustainability. Liquidity in a business can be achieved by maintaining a cash reserve, minimizing inventory, managing account payables, and borrowing wisely. Without business liquidity, the management of a business has to run the risk of bankruptcy.
