What is liquidity

Liquidity means the ability your company has to pay bills, fixed expenses, and unforeseen expenses.

What is liquidity

Liquidity means the ability your company has to pay bills, fixed expenses, and unforeseen expenses.

Liquidity is a crucial aspect of a company’s financial health, representing its ability to meet various financial obligations promptly. This includes not only regular bills and fixed expenses but also unexpected costs that may arise.

Achieving good liquidity ensures that a company can smoothly handle day-to-day operations, respond to unforeseen challenges, and take advantage of strategic opportunities.

Calculate the liquidity ratio of your company

To find out if your company has good or bad liquidity, you can calculate the liquidity ratio. The liquidity ratio calculates the prospects of whether you can pay what you need in your company.

There are four types of liquidity ratios you can calculate, but the most common is to calculate liquidity ratio 1 and 2.  Read more about how you can calculate the liquidity ratio of your company.

Set up a cash flow budget

All companies should have a cash flow budget. It makes it much easier to plan for the company to pay its expenses and is a useful tool. It doesn’t have to be complicated, but it can help the company’s liquidity.

In a cash flow budget, you will find the difference between estimated inflows and outflows for the upcoming period. This difference is often called the budgeted cash flow result and shows how much money you will have leftover this period. The money you have left over can be used for investment or to have on hand in case unforeseen expenses arise. If you know that your income will vary from month to month, it is wise to have a little extra for the months when you may go below budget.