Why might a company assess its liquidity risk?

A company assesses its liquidity risk primarily to evaluate its ability to meet short-term financial obligations. This involves understanding how readily it can convert its assets into cash to cover liabilities that are due in the near future, such as payments to suppliers, payroll, and other operational expenses. By analyzing liquidity risk, a company can ensure that it has sufficient cash flow to operate effectively and avoid potential solvency issues.

Monitoring liquidity is essential for maintaining financial stability, as inadequate liquidity can lead to missed payments and damage to the company's creditworthiness. This assessment helps businesses strategize effectively about their cash management, ensuring they can respond to unexpected expenses or changes in the marketplace without compromising their operational capabilities.