Liquidity refers to the ability of an asset to be easily converted into cash without significantly affecting its market price. In other words, it is the ease with which an asset can be bought or sold on the market.
For a non-financial manager, understanding liquidity is important because it can impact the company's ability to meet its financial obligations and make important business decisions.
For example, if a company has a lot of liquid assets, such as cash or short-term investments, it will be able to pay its bills and make necessary purchases without difficulty.
On the other hand, if a company has mostly illiquid assets, such as real estate or long-term investments, it may have a harder time accessing the cash it needs to meet its financial obligations or make important business decisions.
Liquidity is often measured using metrics such as the current ratio, which compares a company's current assets (such as cash, accounts receivable, and inventory) to its current liabilities (such as accounts payable and short-term debt).
A high current ratio indicates that a company has a strong ability to meet its short-term financial obligations, while a low current ratio may indicate potential financial difficulties. It is important for non-financial managers to understand liquidity and how it can impact the company's financial stability and decision-making abilities.