Q:

Why is liquidity important?

A:

Quick Answer

Investopedia explains that liquidity is important because liquid assets can be bought or sold without compromising their value. A liquid asset is one that can easily be converted to cash in a short period of time, giving the owner of the asset greater financial freedom.

Continue Reading

Full Answer

About.com explains that liquid assets are important to have in times of crisis or emergency because they are so easily converted into cash. Without liquidity, money can become tied up in systems that are difficult to cash out of and even more difficult to assess for actual cash value. During times of emergency, large financial institutions shut down, making it difficult for people to access the cash they need to buy essentials like food, gasoline and other emergency supplies.

According to About.com, liquidity is also used to determine the financial health of a business or personal investment portfolio. Three liquidity ratios are used for this purpose, including the current ratio, the quick ratio and the capital ratio. Liquidity not only helps ensure that a person or business always has a reliable supply of cash close at hand, but it is a powerful tool when it comes to determining the financial health of future investments as well.

Learn more about Business Resources

Related Questions

Explore