Definition for : Liquidity - balance sheet

Liquidity of Balance sheet derives from the fact that the turnover of Assets is faster than the turnover of Liabilities. The Maturity schedule of Liabilities is known in advance because it is defined contractually. However, the liquidity of Current assets is unpredictable (Risk of Sales flops or inventory Write-downs, etc.). Consequently, the clearly defined Maturity structure of company's Liabilities contrasts with the unpredictable liquidity of its Assets. Balance sheet is liquid when for each Maturity, there are more Assets being converted into cash (Inventories sold, Receivables paid, etc.) than there are Liabilities coming due.

(See Chapters Chapter 4 Capital employed and invested capital and Chapter 12 Financing of the Vernimmen)

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