In financial terms, what is 'liquidity'?

Liquidity refers to the ability to quickly and easily convert assets into cash without significantly impacting their value. A business with high liquidity has enough cash or easily sellable assets to meet its short-term obligations. This is especially important for managing day-to-day operations, paying bills, and covering unexpected expenses.

In contrast, while options related to revenue, total asset value, and the relationship between expenses and revenue deal with a business's financial health, they do not specifically measure how quickly assets can be turned into liquid cash. Understanding liquidity is vital for assessing a company's financial stability and its capability to respond to urgent monetary needs.