Technical definition
The ability to meet obligations when they fall due without unacceptable loss.
How it works
Liquidity analysis combines cash, expected collections, payment schedules, credit facilities and asset convertibility. Ratios provide indicators, but timing and quality of current assets matter as much as their amount.
Everyday example
Two firms can have the same current ratio while one holds cash and the other slow-moving inventory.
Common pitfall
Profitability and liquidity are different dimensions; a profitable business can become unable to pay.