The Importance of Liquidity
- Liquidity is defined as the ability of a business to pay back its short-term debts, e.g. its suppliers
- A businesses that cannot pay its debts is considered insolvent
- If a business cannot pay its suppliers, raw materials or components may not be delivered and production will be delayed
- If it cannot repay an overdraft, banking facilities may be withdrawn, and its credit rating will suffer
- Creditors may force it to stop trading and sell its assets so that the debts owed to them are repaid
- Stakeholders interested in liquidity include
- Suppliers want to be reassured that a business is likely to be able to pay for them
- Financial providers such as banks want evidence that a business is likely to be able to repay loans or overdrafts
- Customers want to be sure that a supplier will be able to produce and deliver goods it orders