What Do Cash Flow Statements Have to Do With Liquidity?

by Fraser Sherman Google

Your company has liquidity if it has plenty of liquid assets, which are cash or assets that you can convert to cash quickly. If your company's money is tied up in other assets, such as buildings or equipment you can't sell easily, or you have high expenses, that may leave you with little cash available. Cash flow statements help you measure your company's liquidity.

Cash Flow Statement

Cash flow statements measure how much money you received and spent over a given accounting period. The statement looks at three types of income and expenses: loans and other financing, investments and operations. The statement's bottom line shows the net increase or decrease in cash for a given period. The net operating cash flow shows whether the company's core business is bringing in money, as opposed to increasing liquidity by taking out a loan.


Your company can have lots of income without having much cash. If you make three or four big sales but they're all on credit, you count them as income if you use accrual accounting. Likewise, if you make a several large purchases on credit, that affects your profitability for the period but not your cash flow. Knowing your cash flow as well as your income matters because without cash you can't pay your taxes, employees or any bills that have come due.

Working Capital

Working capital is the amount of cash you have on hand to operate your business. You're working capital for the next quarter, for instance, is your current amount of cash, plus near-cash assets, such as money market accounts, less any liabilities you have to pay in the coming quarter. If your working capital is small, your liquidity is low, which means you don't have much flexibility to cope with emergencies or seize unexpected opportunities.

Cash Flow Budget

If your liquidity over the next quarter or year is tight, a cash flow budget can help. The budget charts your cash flow for the period by each week, month or quarter based on when you expect payments from customers and when you have to pay expenses. If the budgets show periods with lots of cash expenses and very little cash income, you know you have to take steps to improve liquidity; take out a loan or tap your reserves, for instance.

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