Liquidity - Cash is King

Liquidity reflects cash or cash equivalents a business has, or has access to, meet business needs. The phrase “Cash is King” stems from times of economic downturn when those with cash are able to buy assets at a deep discount. While there are number of reasons that liquidity can be an asset, having too much liquidity may speak to poor cash management practices.

On a day-to-day basis, a business must have sufficient cash to meet short term obligations such as paying creditors, payroll, taxes, etc. A well designed liquidity management program also allows a cushion to weather economic downturns. Beyond that, an effective forecasting program can help management decide when to increase cash reserves to be ready to jump on invest opportunities or focus on R&D. Managing liquidity is a blend of finance and fortune telling.