Liquidity refers to how quickly a company could covert its assets into cash to pay its bills. Liquidity reflects an asset’s “nearness to cash”. For operating assets, liquidity relates to the timing of cash flows in the normal course of business. For non-operating assets, liquidity refers to marketability. The liquidity of a company is an indication of its ability to meet its obligation when they come due. Liquidity is positively related to financial flexibility but negatively related to both risk and return on investments. A more liquid company is likely to have a superior ability to adapt to unexpected needs and opportunities, as well as a lower risk failure. On the other hand, liquid assets often lower rates of return than non-liquid assets.
Liquidity refers to company's ability to meets its current obligations. Thus liquidity test focus on the size of and relationship between, current liabilities and current assets. (Current assets presumably will be converted into cash in order to pay the current liabilities).
Cash in hand or money, is the most liquid asset, and could be used instantly to perform financial actions such as selling, paying debt or buying, meeting immediate needs and wants.
In banking, the liquidity is the ability to meet obligations while they occur due without incurring unacceptable losses. The managing liquidity is a daily method or process requiring bankers in order to project and monitor the cash flows to make sure sufficient liquidity is maintained. It is very important to maintain a balance between short-term liabilities and short-term assets. For an in individual bank, customer’s deposits are its main liabilities (which means the bank have to give ball all the client money or deposit when they demand), whereas loans and reserves are its main assets (i.e. these loans are owed to the bank, but not by the bank).