Short-term liquidity of an enterprise is measured by the degree to which it can meet its short-term obligation. Liquidity implies the ready ability to convert assets into cash or obtain cash.
The significance of short-term liquidity can be rapidly appreciated, and the measures of such liquidity have been of great importance.
- The short-term liquidity evaluation is concerned with assessing the unsystematic risk of dying enterprise.
- The least liquid asset is usually considered to be real estate because that can take weeks or months to sell. When we invest in any assets, we need to keep their liquidity levels in mind because it can be difficult or time-consuming to convert certain assets back into cash.
Importance of Analysis of Short-Term Liquidity
The short-term liquidity of an enterprise is measured by the degree to which it can meet its short-term obligation. The importance of short-term liquidity can best be gauged by examining the repercussions that stem from a lack of ability to meet short-term obligations.
The importance of short-term liquidity discusses given below:
- Liquidity is a matter of degree.
- A lack of liquidity prevents a company from taking advantage Of favorable discounts.
- It also implies limited opportunities and constraints on management actions.
- A company’s ability to cover current obligations.
- Short-term leads to the forced sale of investments and assets.
For these causes, short-term liquidity is more important.