Liquidity: General Description of the Term

Liquidity is an economic term that refers to the ability of assets to be converted into funds or their equivalents. A liquid asset is one
that can be quickly converted into money.

The essence of this term lies in the ability to convert the subject of consideration into a common equivalent of value (money). The
speed of this conversion determines the degree of liquidity. This term is most often used by bankers, investors, financiers, and
other professionals in the field of money and asset management.

The term "liquidity" should not be confused with "balance sheet liquidity" and "liquidity ratio." Despite the similarity in sound,
these concepts have different meanings. Let's consider the use of the term in more detail.

Liquidity in the General Sense

Liquidity is the ability of assets to be converted into money or to repay obligations to other individuals or legal entities. A liquid
asset is one that can be quickly converted into money. An important aspect of this term is the speed of such transformation.
Therefore, a distinction is made between highly liquid and low-liquid assets.

Note: Sometimes the term "illiquid asset" is also mentioned. This is not entirely correct, as an asset that cannot be sold at all is not
an asset. According to international financial reporting standards, if the value of an asset cannot be reliably estimated, it cannot
be recognized as an asset. Therefore, the term "illiquid asset" should be considered as slang, meaning an asset with an extremely
low rate of sale or one that has seriously lost its initial value.

Liquidity Management

The ability to repay obligations in a timely manner determines the stability of the business as a whole, which is of interest to users
of the financial statements of the enterprise—business owners, investors, managers, etc. The financial statements of enterprises
are structured in such a way that assets of different degrees of liquidity are in different sections of the balance sheet. This allows
users of financial statements to assess the financial stability of the enterprise.

Example of Grouping Assets by Increasing Liquidity (from low to high):

1. Fixed assets
2. Stock balances in inventory
3. Current receivables
4. Cash on company accounts

Liquidity management is carried out in two ways: by managing assets and by managing liquid borrowed funds. Liquidity risk
management is based on GAP analysis, which consists of calculating the absolute and relative gap between the magnitude and
 dynamics of changes in the level of assets and liabilities at the corresponding maturity dates. When making management
decisions, both economic efficiency and the need to maintain a "conditionally safe" level of assets and liabilities to counterparties
are taken into account.

A Household Example of Liquidity

To explain the meaning of this term at the household level, think about the amount you have set aside "just in case." It doesn't
matter whether it is in the bank or you keep the money at home. This amount may be needed in case of "unforeseen circumstances."
 This way, you maintain your ability to pay sudden cash obligations or quickly purchase necessary goods or services. Similarly,
any enterprise must maintain a certain level of liquidity of its own assets to withstand possible changes in market conditions
or fluctuations in the financial market.

The Importance of Liquidity Management

Competent management of an enterprise's liquidity allows it to overcome adverse market phenomena associated with both industry
 processes and crisis phenomena in the state's finances or a global crisis. During an industrial downturn or a financial system crisis,
the availability of free cash resources for a business decreases sharply, and creditors' requirements for paying off obligations become
 stricter. In such a situation, the presence or absence of free funds in the enterprise can have a serious impact on its fate. Enterprises
try to "free up" as much free cash resources as possible by acquiring highly liquid assets that can be quickly converted into funds.

Stock and Trading Liquidity

The term "liquidity" also refers to the ability to convert funds into a certain asset (securities, commodities, precious metals) and back,
as well as the mutual conversion of currencies. For example, if the difference between the purchase and sale price of a security is
large, we speak of low liquidity. Conversely, with a minimal difference between the purchase and sale price, we speak of high liquidity.

To understand the meaning of this terminology, it is enough to accept the following postulate: the most liquid asset is money. The
speed of conversion of any stock commodity (securities) into money or the level of financial losses in such an operation determine
the degree of liquidity.

The difference between the purchase price and the sale price is called the spread. The larger the spread, the lower the liquidity.
The number of transactions with this type of asset is also important. The more transactions, the higher the probability of a quick sale
of the asset, and the higher its liquidity.

The same can be said about the liquidity of a particular currency, although the term "convertibility" is more commonly used.