Liquidity, in the context of business, refers to the ability of a firm to convert its assets into cash quickly and easily. It is a critical aspect of any business, as it determines the firm’s capacity to meet its short-term financial obligations12. This blog post will delve into the importance of liquidity for Indian businesses, providing recent examples, industry quotes, specific data points, and statistics.
Understanding Liquidity in Business
Liquidity is a measure of a company’s ability to cover short-term financial obligations. It’s a measure of a business’s ability to convert assets—or anything the company owns with financial value—into cash1. Liquid assets can be quickly and easily changed into currency1.
For instance, if a company has a high liquidity ratio, it indicates that the firm has a strong and stable financial position, with enough assets to combat any tough times2. This is an important criterion that creditors check before offering short term loans to the business2.
The Role of Liquidity in Indian Businesses
In the Indian business landscape, liquidity plays a pivotal role in ensuring the smooth operation of enterprises. Here are some reasons why liquidity is crucial:
Meeting Financial Obligations: Liquidity is essential for a business to meet its bills and obligations on time. Having enough cash or liquid assets ensures that a company can make its rent, mortgage, utilities, and other important payments without defaulting3.
Sustaining Operations: Businesses need cash to stay afloat. Even with healthy sales, if a company doesn’t have cash to operate, it will struggle to be successful1.
Facilitating Growth: Adequate liquidity allows a business to invest in growth opportunities, such as expanding operations, hiring more staff, or launching new products or services.
Cushioning Against Uncertainties: Liquidity acts as a safety net during times of economic uncertainty or business downturns. It enables a business to weather financial storms and navigate challenging periods.
Recent Examples
The COVID-19 pandemic has underscored the importance of liquidity. For instance, businesses in India saw an increase of 6 days in the cash-to-cash cycle, and 69% of companies extended their payables to offset the effects of the pandemic on working capital4. Another example is Byju’s, an Indian ed-tech company, which faced a liquidity crisis and expected it to ease in 45-60 days5.
Quotes from the Industry
Several industry leaders have highlighted the importance of liquidity. For instance, Nithin Kamath, Founder and CEO of Zerodha, stated, "I think more businessmen should be more conscious about what is happening around them. There is a concentration of wealth on the planet. That’s accelerating; it’s not going to change. But I think wherever there is a concentration, people should do more to give back"6.
Specific Data Points and Statistics
As per a report, liquidity of Indian firms is measured by liquid assets to total assets7. The Reserve Bank of India’s average daily net liquidity absorption stood at ₹4,96,154 crore during 2020-21 and ₹5,09,098 crore during 2021-22 so far8.
In conclusion, liquidity is a critical aspect of business operations, particularly in the Indian context. Ensuring adequate liquidity can help businesses meet their financial obligations, sustain operations, facilitate growth, and cushion against uncertainties
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