What does liquidity refer to in financial management?

Liquidity in financial management refers to the readiness of resources to cover short-term cash needs. This concept is crucial because it indicates how easily assets can be converted into cash to meet immediate obligations. For example, cash in hand and funds in checking accounts are highly liquid, while real estate or investments may take longer to sell and convert into cash, making them less liquid.

Understanding liquidity is essential for individuals and businesses alike, as it impacts their ability to respond to unexpected expenses, maintain operations, and navigate financial emergencies without resorting to high-cost borrowing or selling illiquid assets at unfavorable prices. Essentially, maintaining sufficient liquidity ensures that short-term financial commitments can be met promptly, thereby promoting overall financial stability.