Cash Flow vs. Liquidity: Understanding the Difference

Cash Flow vs. Liquidity: Understanding the Difference
Photo by Pixabay

Cash flow liquidity is not an accurate statement, yet you’ll find a lot of people talking about it. Instead, cash flow and liquidity are two very different things that must be looked at differently if you want to understand the financial health of a company.

What is Cash Flow and How Does it Differ from Liquidity?

Cash flow forecasting and liquidity are important metrics for your business. The main differences between these two are:

Cash Flow

A business’s cash flow is the difference between cash flow from the beginning and end of an accounting period. A few points to consider:

  • Opening balance is your starting cash flow
  • Closing balance is your ending cash flow
  • Cash flow is an indication of operating activities

Cash flow is the difference between the cash that comes into and goes out of a business during a certain period.


Liquidity is how much cash your business has to cover short-term obligations, such as payroll, inventory and other operational expenses. The “short-term” is defined by being anything under 12 months, while long-term is anything over 12 months.

Additionally, liquidity will take into account any of the assets that you can sell with little-to-no loss in value.

  • Liquid assets may include:
  • Short-term bonds
  • Accounts receivable
  • Money market accounts
  • Etc.

Benefits of Cash Flow vs. Liquidity

Cash flow liquidity has its own benefits, but you’ll need to have strong cash flow in the long term if you want your business to remain viable.

Benefits of Strong Cash Flow

  • Liquid assets increase with higher cash flow
  • Easier to settle debts
  • Can use cash to reinvest in the business
  • Provides opportunities to save for future challenges

Benefits of Liquidity

  • Can convert assets into cash
  • Ability to meet short-term liabilities
  • Reduces the risk of needing to take on more debt
  • Can cover financial emergencies with greater ease

Different Types of Cash Flow and Liquidity Metrics

Cash flow and liquidity both have their own metrics, which you can use to understand a business’s financial health. For example, one metric that is used often is the liquidity ratio. A liquidity ratio is defined as: the business’s ability to pay off any existing debt without needing external capital.

You’ll also find additional metrics, such as:

  • Operating cash flow
  • Cash flow from operation
  • Free cash flow
  • Working capital
  • Days sales outstanding
  • Accounts payable turnover
  • Current ratio
  • Many others

It’s important for businesses of all sizes to work on strategies to improve both cash flow and liquidity.

Strategies for Increasing Your Cash Flow

Improving cash flow in business is possible if you take a strategic, proactive approach. First, when you can, lease items and do not buy them. Leasing does cause a long-term issue because you’ll spend more money in the long run, but leasing eliminates high capital costs that will cause immediate drops in cash flow.

Enticing accounts receivables to pay faster is important, and this can be done in numerous ways. You can offer an early payment discount, set up invoice reminders and even conduct credit checks on the people you do business with to lower the risk of non-payment.

You can also increase your cash flow by:

  • Automatically sending out invoices
  • Accepting electronic payments
  • Negotiating better deals with suppliers
  • Increasing your prices

You should always work on new, exciting ways to increase your cash flow. If you maintain healthy cash flow levels, you’ll be less at risk of having to take on debt in the future.

Strategies for Increasing Your Liquidity

Improving liquidity is possible and something that you should be doing. A few steps that you can take to improve liquidity include:

  • Sweep accounts, or try to transfer high-interest accounts to lower-interest ones
  • Analyze overhead expenses and find ways to lower them
  • Sell unproductive assets while they’re still in good condition and can be sold at a good profit
  • Monitor your accounts receivable and push for faster payments
  • Work on longer terms with vendors and suppliers to keep money in your accounts for longer

If you can improve your liquidity, you’ll open up many growth opportunities for the long term. Additionally, you’ll have a lower risk of debt or not being able to meet your financial obligations in the future.

Tools to Monitor Your Cash Flow and Liquidity Ratios

Cash flow vs liquidity can be analyzed manually, but it’s better to use a tool like, which will allow you to:

  • Run cash flow reports
  • Use scenarios
  • Create projections
  • Gain customer insights
  • So much more

When you use tools to monitor your cash flow and liquidity, you’ll improve your business’s decision-making capabilities.

Cash Flow vs. Liquidity: Understanding the Difference
Photo by Pixabay

In Conclusion

Cash flow vs liquidity is something every business owner, investor and stakeholder needs to understand. You can have a healthy cash flow and lack the liquidity needed to invest in the business’s future.

Liquidity can help you pay your business’s liabilities, but over the long term, you will need strong cash flow to keep the business operational.

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