A strong liquidity position ensures operational stability and prevents insolvency.
Liquidity
Liquidity refers to a business's ability to convert assets into cash quickly to meet short-term obligations.
Cash is the most liquid asset, while others like inventory or equipment take longer to convert into cash.
A retail store with \$100,000 in inventory but only \$5,000 in cash may struggle to pay \$10,000 in monthly rent. Despite having valuable assets, its lack of liquidity poses a risk.
Liquidity is assessed using financial ratios that evaluate a business's ability to cover its short-term liabilities.
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