The idea of liquidity is used in the field of accounting and economics to refer to the quality of an asset that can be easily converted into cash . Liquidity is also called the link that exists between the total assets of an organization and the set formed by cash on hand along with assets that can be quickly transformed into money.
Liquidity, therefore, is related to the possibility of converting assets into cash quickly and with little or no loss of value. The greater the liquidity, the greater the ability to generate cash immediately.
Coins and banknotes have absolute liquidity . The same can be said for bank demand deposits , which can be withdrawn from the account at any time either from a branch or even from an automated teller machine (ATM).
On the contrary, a fixed term has limited liquidity: it is necessary to wait for the established period to expire to access the money . A property , meanwhile, also has very limited liquidity because there is a significant time distance from when it is put up for sale until the operation is completed with all its legal steps and the money is obtained.
It is common for liquidity to be the opposite of profitability . The more liquid an asset is, the less profitability it offers. The interest paid by a fixed term, for example, is much higher than that provided by a deposit in a savings account, to cite one case. In any case, when high inflation occurs, liquidity loses value.
From the definition presented so far, we can deduce that liquidity is not the same as profits : it is simply a fundamental indicator to meet the company's short-term obligations. In other words, it teaches us its ability to produce cash immediately.
This can be extended to another comparison: selling does not always bring an amount of money in the box. What does this mean? That an important part of that money must always be allocated to the payment of obligations , among which are the salaries of employees, the rent of the property and basic services.
In fact, many profitable companies struggle to achieve liquidity due to implementing poor strategies. Below we present some tips to increase the liquidity of a business .
The first tip is to manage stock efficiently . An opposite situation occurs when a company must spend a lot of money to make an investment without having the guarantee that the sale will be made. Stock optimization is a good starting point towards better cash flow and cost reduction for unsold merchandise .
On the other hand, automation and adjustment of payments and collections, both dates and methods , are recommended. This is essential to guarantee liquidity in the short, medium and long term.
It is also good practice to charge in cash . Of course, to do this it is necessary to identify and attract clients who have this possibility, since they are the ones that provide the most advantages to the business. Collection periods should never be longer than payment periods.
It is important to note that the word liquidity is a feminine noun and that "liquid", in this context, is used as an adjective, unlike what usually happens in everyday speech when we say "I should drink more liquid during the day", where acts as a noun. Two possible synonyms for "liquidity" are " solvency " and "fluidity."