Understand Liquidity, the Most Important Aspects of the Company

As mentioned earlier, liquidity is the ability of a company to pay off debt and short-term liabilities. The company’s short-term debt includes trade payables, taxes, dividends, and so forth. 

Liquidity can also be interpreted as the ability of individuals or companies to pay off debt immediately by using current assets owned. Without having these capabilities, the company will not be able to carry out business operations as usual.

The level of liquidity that a company has is generally described using certain numbers. Figures that describe liquidity are commonly referred to as fast ratios, current ratios, and cash ratios. 

When measuring company performance using liquidity, the higher the value, the better the performance. The reason is, when a company has a high level of liquidity, the opportunity to get support from various parties is also increasingly wide open. 

Financial institutions, suppliers, to creditors certainly tend to choose companies with high liquidity to ‘save’ their funds. So, the liquidity owned by this company plays a very important role in showing its performance as well as being an investment target for investors.

Benefits and Role of Liquidity

Liquidity does not necessarily indicate the company’s ability to pay off its short-term debt. There are several benefits and other roles of the level of liquidity held by a company.

The benefit of knowing the level of liquidity for the company is to help the process of analysis and interpretation of short-term financial conditions. So, by knowing the level of liquidity, companies can improve their financial condition when there are things that make business performance less than optimal and efficient.

Meanwhile, the roles are as follows:

1. As a Media for Conducting Business Operational Activities

The first role of liquidity is as a medium for conducting daily business operations. Liquidity can also be a tool or data to anticipate the need for funds that suddenly appear and urges companies to pay it off immediately.

2. Can Facilitate Companies in the Field of Financial Institutions

The second role is to facilitate companies in the field of financial institutions in providing loans or withdrawing funds by customers. That way, customers do not need to be bothered by the company because the requested funds cannot be searched quickly.

The level of liquidity owned by the company can also be used as a reference to the level of flexibility of the company. This level of company flexibility can then be taken into consideration in investment cooperation and other businesses that can be profitable. 

When liquidity is deemed unsatisfactory, the company can make this information as evidence of the need to improve its performance so far. The company is also able to analyze what business decisions are deemed unnecessary or detrimental with other business decisions that are more profitable. The company management has also become better able to check the efficiency of working capital.  

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