Liquidity is an economic term that refers to the ability or the possibility of asset (property) sales in the financial market without affecting the decline in their prices during the sale. The term liquidity may also reflect the enterprise’s ability to convert its assets to cash to cover in time, in the required form and required place, all debts.
In terms of the level of liquidity, the sequence of assets is as following (from most liquid):
- Money (Cash)
- Receivables for goods and services, Bonds
- Product inventories
- Semi-finished products, raw materials, etc.
- Machinery, buildings are the least liquid assets
Use of the liquidity in practice: Assets liquidity management is one of the fundamental tasks of any financial manager (CFO), especially when managing cash flow of the organization. Each economic entity must have enough liquid funds to cover its obligations - accounts payable. The organization, and in particular enterprises use liquidity ratios for knowledge and expression of the liquidity of their assets.