Liquidity

What is liquidity?

When we talk about liquidity in the economy, we can say that it is the quality possessed by assets to be converted into monetary income quickly, without these having any devaluation when this process is carried out.

It is for this reason that, the shorter the time it takes to transform a product into money, the more liquid it is considered.

Types of liquidity

The types of liquidity that exist in the economy are the following:

• Long term: These are those that, although they can be sold, run the risk of have losses, that is, there is no security of receiving profits. In this category are the real estate.
• Medium term: This is effective in a period of 1 to 4 months. Among them we find bonds with the possibility of quick sale, investment funds, financial certificates, among others.
• Righ now: when you can get the money in a way immediatesuch as cash, bank deposits, etc.
• Advanced: are those helps that can be received without belonging to the company. For example, credit cards or loans.

Calculate the liquidity ratio

To know how much is the liquidity capacity that an organization has, the general balance of this must be consulted. There you will be able to know if you have the amount of assets and liabilities to calculate the liquidity index.

Once the current assets and liabilities are known, it will only suffice to divide them to know the liquidity index of the organization.

Formula to calculate the liquidity ratio.

The liquidity index can give us 2 different results:

• Greater than 1: means that the business has an asset margin with good liquidity, that is, capable of being converted into cash in a short period.
• Less than 1: the organization has problems with liquidity and you may need to cancel obligations in a short term.

The greater the distance to 1, the better or worse degree of liquidity the organization in question will have.

Examples of liquidity

To better understand this concept, let's look at 2 examples of asset liquidity:

• A deposit in bank account An organization is a highly liquid asset that an organization owns, since it can have cash at any time.
• The property of an organization are an asset with little liquidity, since if you want to sell to access the cash that is valued, it can take a long time.