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Definition and Examples of


Expanded Explanation: Liquidity refers to the ability of a company to meet its short-term obligations using its most liquid assets. High liquidity ensures that a company can promptly pay off its debts without incurring losses from selling long-term assets. It’s essential for maintaining good credit, ensuring operational stability, and preparing for unexpected expenses.

Potential Issues: Poor liquidity can lead to difficulties in meeting short-term obligations, which might necessitate taking on additional debt, selling assets at unfavorable prices, or facing insolvency.

Example: If your boutique can quickly convert its inventory into cash but has minimal cash reserves, it has high liquidity through its inventory.

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