Liquidity Risk

Liquidity risk is the risk that an entity may not be able to meet its short-term financial obligations because it cannot quickly convert its assets into cash without incurring a significant loss in value. This risk is particularly relevant for businesses and individuals when they face situations where they need cash to cover immediate expenses, such as paying bills, servicing debt, or addressing unexpected financial emergencies. Managing liquidity risk is essential to ensure that an entity has sufficient liquid assets or access to credit facilities to meet its short-term financial commitments promptly and without distress.