Types of Liquidity
1. Asset Liquidity: Asset liquidity means how fast an asset can be converted into cash without affecting its market price. Highly liquid assets are easy to buy or sell, while assets with low liquidity may take longer to sell. Various assets are considered liquid assets, for instance, bills receivables, short-term investments, cash and cash equivalent, etc.
2. Market Liquidity: It refers to the condition of the market in which a company can easily be bought or sold. High market liquidity indicates that there are enough buyers and sellers in the market to execute the trade easily.
3. Fund Liquidity: Fund liquidity is when a company has enough funds to meet its short-term financial obligation. Businesses should have sufficient fund liquidity to cover operational expenses and other financial commitments. It is essential to have effective cash flow management to maintain fund liquidity.
4. Accounting Liquidity: It refers to the ability of a company to meet its short-term financial obligations using its readily available resources. The accounting liquidity can be measured with the help of the current ratio and quick ratio.
5. Regulatory Liquidity: Regulatory liquidity ensures the stability and ability of financial institutions to stand up against financial shocks. It is the liquidity requirements that are imposed by regulators on financial institutions. These requirements may include maintaining minimum levels of liquid assets or liquidity ratios.
Contact Us