5.2 Liquidity planning

The term liquidity has a double meaning.

a)       Liquidity as a property of an asset (fixed capital),

b)       Liquidity as a company's willingness to pay (working capital).

To a) How quickly can an object be converted into money?

Re b) How can the payment obligations always be met on time?

The comparison of cash and cash equivalents with liabilities yields the liquidity ratio. Liquidity ratios:

• Liquid funds 1st order = cash liquidity that is immediately tangible such as cash, bank and postal cheque balances, discountable bills of exchange.
• Liquid funds 2nd order = collection-related liquidity that can be made liquid within 3 months, e.g. customer receivables, securities.
• Liquid funds 3rd order = turnover-related liquidity that can only be made liquid after a longer period of time, e.g. work in progress, raw materials.
• Illiquid assets are those that are very difficult to convert into cash, such as land, buildings, machinery.