How does liquidity work and what are the advantages and disadvantages of liquidity?

Expert Answers
Karyth Cara eNotes educator| Certified Educator

I conclude that your question about liquidity is in context of business operation liquidity, not market liquidity or investment liquidity, which are both a bit different from business operation liquidity though all rely upon the ease of conversion to cash.

Liquidity in business operation refers to cash on hand in an account or in "petty cash" (which can sometimes quite sizable despite being "petty") or cash from the conversion of assets or cash that can be borrowed. Liquidity essence is the ease a business can turn assets or reputation into cash in hand.

The advantage of high liquidity in business is that expansion or acquisitions or changes in operational plans can more easily be funded and unexpected debts can more easily be paid.