Perhaps the majority of you have heard of the news about insurance companies that cannot afford to pay their customers’ bills. Customers in the financial services are then threatened not to be able to take the money that has long been stored in the company. The debt owed by the insurance company is estimated to reach tens of trillions. The case is an example of a company that does not have enough liquidity to pay off all debts and liabilities that it has. When a company’s liquidity is low, the business that is being run maybe just waiting for bankruptcy. Knowing this fact, liquidity is one of the most important aspects of a company so that its use can be regulated using Xero Silverwater.
As mentioned earlier, liquidity is the ability of a company to pay off debt and short-term liabilities. The company’s short-term debt includes trade payables, taxes, dividends, and so on. Liquidity can also be interpreted as the ability of individuals or companies to pay off the debt immediately by using current assets owned. Without having these capabilities, the company will not be able to carry out business operations as usual. The level of liquidity that a company has is generally described using certain numbers. Figures that describe liquidity are commonly referred to as fast ratios, current ratios, and cash ratios.
Liquidity does not necessarily indicate the company’s ability to pay off its short-term debt. There are several benefits and other roles in the level of liquidity held by a company. The benefit of knowing the level of liquidity for the company is to help the process of analysis and interpretation of short-term financial conditions. So, by knowing the level of liquidity, companies can improve their financial condition when there are things that make the business performance less than optimal and efficient. The first role of liquidity is as a medium for conducting daily business operations. Liquidity can also be a tool or data to anticipate funding needs that suddenly emerge and urge companies to pay it off immediately.