What does 'liquidity' refer to in a business context?

In a business context, liquidity specifically refers to the ability of a company to meet its short-term financial obligations, which includes the capacity to pay off liabilities that are due within a year. This concept is critical for ensuring that a business can continue to operate smoothly without facing financial distress.

Liquidity is often measured using financial ratios such as the current ratio and the quick ratio, which assess the relationship between a company's liquid assets (such as cash and accounts receivable) and its current liabilities. A company with good liquidity can quickly convert assets into cash to satisfy immediate expenses, which is vital for maintaining operations, investing in opportunities, and managing unforeseen financial challenges.