Liquidity is the measure of how well your company is able to pay short-term obligations. It shows whether there are sufficient funds to pay bills, wages and taxes on time. Many business owners confuse profitability with liquidity – but profit on paper is not the same as money in the bank. Liquidity is all about available cash and determines whether your business will remain financially sound in the short term.
Why is liquidity important for entrepreneurs?
Good liquidity is crucial to the continuity of your business. When liquidity deteriorates, the consequences can be immediate:
- Payment problems: suppliers may stop deliveries or apply stricter terms.
- Reduced creditworthiness: banks and investors pay close attention to the liquidity position.
- Missed growth opportunities: insufficient liquidity means no room for investment or expansion.
On the contrary, a company with healthy liquidity has more flexibility and can respond more quickly to opportunities.
How do you calculate liquidity?
There are several ways to calculate liquidity. The three most commonly used ratios are:
- Current ratio
- Quick ratio
- Working Capital
Calculate current ratio
The current ratio compares current assets to current liabilities.
Formula:
Current ratio = Current assets ÷ Current liabilities
| Item | Amount |
|---|---|
| Current assets | € 200.000 |
| Current liabilities | € 100.000 |
| Current ratio | 2,0 |
Interpretation: For every euro of current liabilities, the company has two euros of current assets. A current ratio between 1.2 and 2.0 is generally considered healthy.
Quick ratio calculation
The quick ratio is similar to the current ratio, but excludes inventories because they are not always readily marketable.
Formula:
Quick ratio = (Current assets – Inventories) ÷ Current liabilities
| Item | Amount |
|---|---|
| Current assets | € 200.000 |
| Stocks | € 50.000 |
| Current liabilities | € 100.000 |
| Quick ratio | 1,5 |
Interpretation: Without selling inventory, the company can meet 1.5 times its current liabilities. A quick ratio above 1.0 indicates that the company has sufficient cash.
Calculate working capital
Working capital represents the absolute amount left to cover short-term expenses.
Formula:
Working capital = Current assets – Current liabilities
| Item | Amount |
|---|---|
| Current assets | € 200.000 |
| Current liabilities | € 150.000 |
| Working capital | € 50.000 |
Interpretation: With €50,000 positive working capital, the company can absorb unexpected costs. A negative working capital, on the contrary, may indicate liquidity problems.
Prepare liquidity budget
A liquidity budget provides insight into future income and expenses. This allows you to see in a timely manner if and when a deficit will occur. This helps with:
- Predictability: understanding peaks and troughs of cash flows.
- Planning: preparing for seasonal influences or investments.
- Control: take timely measures to prevent liquidity shortages.
A financial expert can help create and maintain realistic liquidity planning.
We help improve and monitor your liquidity
At Oakhill Financial Services, we help business owners get a handle on their liquidity. Our services combine data, strategy and insight:
CFO Services
With CFO as a Service we provide strategic financial leadership. We help with forecasting, cash flow management and investment decisions that directly impact liquidity.
Oakhill Insights
Our real-time dashboards provide continuous insight into the liquidity position, allowing you to react faster and make informed decisions.
Control services
With our audit services streamline financial processes and internal controls to reduce inefficiencies and prevent cash leaks.
Oakhill Base
For companies looking to strengthen the basics of their financial management. We help with our accounting services in setting up reliable reporting and systems for sustainable liquidity monitoring.
Schedule a no-obligation consultation to discover how Oakhill can strengthen your liquidity position.
Frequently asked questions about liquidity (FAQ)
When is a company liquid?
A company is liquid when it can meet its obligations in the short term, usually with a current ratio above 1.0 or positive working capital.
What is a good liquidity ratio?
A current ratio between 1.2 and 2.0 and a quick ratio above 1.0 are considered healthy, depending on the industry.
What is the difference between current ratio and quick ratio?
The quick ratio excludes inventories, while the current ratio includes them. Thus, the quick ratio gives a more realistic picture of immediate liquidity.
How often should you calculate liquidity?
It is wise to calculate liquidity monthly to keep trends visible and make timely adjustments.
Why is liquidity important to investors and banks?
Liquidity shows that a company is financially stable and can meet obligations – an important factor in credit ratings.
What is the difference between liquidity and solvency?
Liquidity deals with short-term payment capacity, while solvency looks at long-term funding and debt ratios.
What happens when a company lacks liquidity?
A lack of liquidity can lead to late payments, loss of confidence with suppliers and ultimately bankruptcy.
© 2025 Oakhill Financial Services B.V.
Data-driven CFO services for growing businesses. Discover our CFO services.