10.2 Analysis of Published Accounts

Cambridge A2 Level Business — 9609

1.1 The Meaning and Importance of Liquidity

Liquidity means the ability of a business to pay back its short-term debts — money it owes and must pay soon, such as to its suppliers or its bank.

Think of it like your personal wallet. If you owe a friend $10 today but have no cash, you have a liquidity problem — even if you are "rich" on paper.

A business that cannot pay its short-term debts is called insolvent (meaning it cannot meet its financial obligations).

Why is liquidity important?

• If a business cannot pay its suppliers, those suppliers may stop delivering raw materials or components. This means production stops and the business cannot make its products.
• If a business cannot repay an overdraft (money borrowed from a bank for short-term needs), the bank may take away that borrowing facility and the business's credit rating (its reputation for paying back money) will suffer.
• Creditors — the people or businesses owed money — may go to court to force the business to sell its assets so they can be repaid.
• In extreme cases, a business with very poor liquidity may be forced to stop trading entirely.