Liquidity – The efficiency or ease with which an asset can be converted into ready cash
To remember what liquidity means use the following mnemonic:
The cash floats on the liquid (cash is liquid) but the brick just sunk and was not affected by the liquid (bricks and mortar not liquid).
The liquidity of each item in a company is determined by how easy it is to turn into cash to pay all the bills.
Cash in the bank is the most liquid asset. The building the company may own and works in could be considered the most illiquid (least liquid) asset. A building would take a long time to move out of, leave in a clean condition and then put on the market to resell. This could take more than a year and so this asset is considered one of the least liquid items.
If you plotted each asset in your company on a line between two extremes (called a continuum line) then you may get the following: