Key Takeaways
Liquidity is the ability of a business or company to turn what they own into cash immediately.
The Quiet Factor That Can Make or Break a Business
Your business is thriving. Orders are coming in, projects are moving forward, and your equipment is hard at work. On the surface, everything looks strong. Yet when it’s time to pay suppliers, cover wages, or grab hold of a new opportunity, the funds in your account seem to vanish too quickly.
This is a situation many businesses recognise but don’t always talk about. You can have steady work, loyal customers, and valuable assets — and still feel a pinch when it comes to day-to-day spending power. It’s doesn’t really matter what size your business is, it is about having enough money to move, because in business, the more you move the more money you can potentially make.
The same is true with us individuals, the less we move the less productive we are and the less productive we are the less money we make for ourselves. Now, it is very important to have as much cash reserve as possible, it doesn’t have to be cash by the way, you can just have a lot of asset that you can use to turn cash as soon as possible!
The reason is simple, you need to have enough cash so when the opportunity arises, you can grow your business to the next level without hurting your business’ financial health.
What is Liquidity?
In the simplest terms, liquidity is your ability to turn what you own into cash quickly — without losing too much value in the process. It’s about how fast your business can access spendable money when it needs it.
Think of it like this: your bank account is liquid because you can use the funds instantly. A fleet of trucks, on the other hand, might be valuable, but selling one takes time, involves paperwork, and may not get you the full value if you need the sale to happen fast. One is ready-to-use money; the other is tied-up value.
Liquidity isn’t just a financial term — it’s the fuel that keeps your business moving. High liquidity means you can easily cover payroll, pay suppliers, or take advantage of new opportunities. Low liquidity means you might struggle to meet those same needs, even if your business looks healthy on paper.
A business can be making a profit but still face challenges if its money is tied up in assets or waiting to come in from unpaid invoices. This is why many financially sound companies can still find themselves under short-term pressure — their value exists, but not in a form they can spend right away.
Liquid vs Illiquid Assets
Liquid assets are the easiest to access. These are the resources you can tap into almost instantly to meet expenses, grab opportunities, or handle emergencies. They include:
Liquid assets are the easiest to access. These are the resources you can tap into almost instantly to meet expenses, grab opportunities, or handle emergencies. They include:
- Cash in hand or in the bank
- Money in current accounts that can be withdrawn immediately
- Publicly traded shares or bonds that can be sold quickly without a major loss in value
On the other side are illiquid assets — valuable, but not easy to convert into cash at short notice. Examples include:
- Property or land, which can take months to sell
- Specialised machinery or equipment that only a small number of buyers need
- Privately held shares in a company, which may require lengthy negotiations before a sale
Do not have the mistake of treating illiquid assets as less important than liquid ones. They are important because they are your money making machines in the most fundamental way, they are just hard to sell right away.
You can have as much liquid assets you want but without proper illiquid assets, it will undoubtedly decrease rapidly over time. Also, a company with only illiquid assets may look strong on paper but still struggle to pay bills on time and having too much tied up in liquid assets without investing in growth will limit long-term potential.
Liquid vs Non-Liquid Markets
Just as assets themselves can be liquid or illiquid, the markets where you sell those assets can also be more or less liquid. This can make a big difference to how quickly — and at what price — you can turn something you own into cash.
A liquid market is one where there are plenty of buyers and sellers, and transactions happen quickly without causing big price changes. Think of the stock market or major foreign currency markets — you can sell shares or exchange currency almost instantly, often at prices very close to the market rate.
A non-liquid market, on the other hand, has fewer buyers and sellers, and transactions take longer. Prices can also fluctuate more, especially if you need to sell quickly. Examples include:
- Niche industrial machinery
- Specialised vehicles
- Certain types of commercial property in low-demand areas
The same asset can be easier or harder to sell depending on market conditions. For instance, selling a piece of construction equipment might be quick and profitable during a building boom, but in a slowdown, you might wait weeks or months — and accept a lower offer.
Knowing market liquidity is just as important as understanding asset liquidity. Even if something is considered “liquid” in theory, if the market for it is sluggish at the time you need to sell, accessing your cash could still be slow and costly.
Examples of Liquid Assets in Business
When people think of “assets,” they often picture big-ticket items like property, vehicles, or machinery. While those can be valuable, they’re not the fastest to turn into spendable cash.
Here are some common examples of Liquid Assets:
Cash in Hand or in the Bank
The most liquid asset of all. You can use it instantly to pay bills, cover wages, or take advantage of new opportunities.
Money in Current Accounts
Funds in your business bank account are ready to use for everyday transactions, whether by transfer, cheque, or card payment.
Short-Term Savings or Money Market Accounts
These can often be accessed within a day or two, giving you quick access to additional funds if needed.
Publicly Traded Shares or Bonds
If your business invests in listed securities, they can often be sold quickly at market value, providing near-immediate cash.
Reliable Accounts Receivable
Invoices due from trusted, on-time-paying customers can be considered liquid to an extent, especially when payment terms are short.
Liquid assets can help you handle surprise expenses and let you move fast when a good opportunity comes up. But if you only rely on these, you might slow down your growth. That’s why it’s important to also focus on building long-term assets like equipment, property, and other items that aren’t as easy to sell but can help your business grow over time. You don’t need to have a lot, you have to have enough.
What Happens When Liquidity Runs Low?
A business can have a healthy order book, loyal customers, and valuable assets — and still run into trouble if it doesn’t have enough liquidity. When the gap between available cash and immediate obligations grows too wide, the effects can ripple through every part of operations.
Here’s what that can look like:
1. Strained Supplier Relationships
If you can’t pay suppliers on time, trust can erode. This may lead to tighter credit terms, reduced order quantities, or even the loss of preferred supplier status.
2. Missed Opportunities
An equipment supplier might offer a special discount, or a new client might need urgent work. Without quick access to cash, your business could miss out on deals that can increase your income and build your reputation.
3. Increased Borrowing Costs
When a business runs low on cash, it often borrows money for a short time — using things like overdrafts, credit cards, or emergency loans. These usually have higher interest rates, which makes them more expensive and can lower your profits.
4. Operational Delays
Without enough liquidity, even small expenses like repairs, maintenance, or restocking can be delayed. Over time, this can slow productivity and frustrate customers.
5. Pressure on Business Owners and Teams
Financial trouble can affect decision-making, staff morale, and overall confidence in the business’s stability.
Low liquidity doesn’t always mean a business is in trouble — it can just mean that money is tied up in assets or in invoices that take a long time to be paid. But if this problem isn’t fixed quickly, it can slow down growth, raise financial risks, and make the business more open to problems it didn’t plan for.
How Businesses Can Improve Liquidity
It is all about accounting for every cent that goes in an out of your business and as much as possible, grab every strategic advantages as much as you can. It’s about making small but smart changes to how you handle money, assets, and bills.
One of the easiest ways is to get paid faster — you can do this by shortening payment terms, offering discounts for early payment, and sending clear, timely invoices. At the same time, try to negotiate better terms with suppliers so you can pay later and have more time to manage your cash.
It also helps to keep a cash reserve — what this means is that, you can’t spend all your profits, you need to have a huge chunk of it as reserve. To stay ahead, watch and forecast your cash flow regularly.
This means checking your numbers and using tools or spreadsheets to spot problems early. Another tip is to avoid putting too much money into illiquid assets — things like property, machinery, or vehicles that are hard to turn into cash. Too much of something is bad, you need to have just enough illiquid assets rather than having too much.
Lastly, as much as possible, spread big costs over time instead of paying for them all at once, so you can enough cash as reserve while getting after your business’ needs. The key is finding the right balance — keep enough cash ready for daily needs, but not so much that you miss chances to grow.
How Asset Finance Can Boost Liquidity
As a business owner, you have to think of many angles to scale your business upwards. You can’t just aim for increasing your liquidity because to be honest, that is the one thing that is very hard to do in every business in all parts of the world.
You dont just have to increase your profits so you’d have a lot of cash reserves to buy the necessary vehicle for you delivery business or, acquire farming equipment, buy a small building, or even get more workers. You can absolutely get these while only a small amount is required and you pay for the rest in terms.
Asset refinance allows you to spread the cost of essential purchases over an agreed term which is achievable if you have enough assets you can use as collateral. This way, you get enough cash to make your next big move. Your cash remains almost the same, you get the things you need to move forward but in return just pay in monthly. There is also unsecured business loans which is basically asset finance without the collateral.
For example, a construction firm needing a new excavator could opt for asset finance rather than paying the full price upfront. The equipment is available immediately for generating revenue, but the company’s cash reserves remain intact — ready to be used elsewhere.
Bottom Line
Most businesses fail to consider that having a business and making a profit isn’t enough. Your business must have a lot of cash reserves before you can call yours stable. Because business owners assume that being healthy on paper means the business is running good.
You get to pay bills, rent, and wages on time and even the suppliers but after all of these are paid, do you have enough cash especially, when there is a business opportunity for you to take advantage of and grow your business? Of course not if this is the current situation of your business.
But realistically this is the case for most businesses. This is the burden of the business world that not all businesses have enough cash lying around for them to use whenever they need.
