 Liquidity refers to a firm's ability to meet its obligations using its assets that can be readily converted into cash. Now an asset's liquidity is subject to its nature and speed at which it is converted into no amount of cash. By liquidity we mean the liquidity of short-term assets and short-term liabilities whereas liquidity measurement as I have earlier said it is the firm's ability to generate cash when and where it is needed by the firm to pay off its short-term debt. There are certain sources where from liquidity can be generated. These can be classified into primary sources and secondary sources. If we talk about primary sources of liquidity, this means availability of readily accessible resources in the form of ready cash that can be in hand or lying with the banks. The second source is the short-term investments and credit lines available to the firm. The third is the management of cash inflows and outflows played by the firm. If we talk about secondary sources of liquidity for a firm, then a firm's financial position may change because of negotiating debt contracts that may relieve a firm from pressure of high interest payments and principles. So little amount of liquidity may be there. Another form of external liquidity is that the liquidation of firm's assets without losing their value. So enough amount of liquidity can be paid for the firm. And third is the filing of bankruptcy protection. So again a firm can get certain amount of liquidity to cover up its short-term liabilities to a certain extent. But a question is there that the usage of secondary sources may signal a firm's deteriorating financial position in the shorter period of time. There is another concept of drag and pull-on equity on liquidity. By drag on liquidity means a lag on firm's receipts that create pressure from declining in the available funds with the firm due to three reasons. The first is the uncollectible receivables. The second is the absolute inventory. And third is the tight credit available to the firm, whereas by pull-on liquidity means the quick payment or thin-trade credit requiring a firm to expand funds before the firm receives funds from sales. Now this pull-on liquidity comes due to three things like the firms are required to make payment earlier. There is a limit on the short-term credit lines set by the bank due to certain inefficiencies with the firm. And the last is the low liquidity position of firm due to certain reasons. By measuring liquidity we mean the firm's ability to cover short-term obligations as they become due. There are certain tools in the form of ratios that can be computed and used to analyze the firm's liquidity level. In this regard, the first is the current ratio. It sets out the firm's ability to pay off its current liabilities out of its current assets and a standard ratio is perceived to be a ratio of two. Then we have quick or acid test ratio. This is the ratio of quick assets in relation to the current liabilities of the firm and an acceptable standard for a general level of business is believed to be equal to one. The third way we have receivables turnover ratio. This ratio tells that how quickly firm converts its sales into receivables. Then we have number of receivables or days or the average receivable turnover ratio or the average collection period. This ratio tells that how quickly a firm gets its receivables converted into cash. Then we have inventory turnover ratio. This ratio tells that how quickly the inventory of a firm replaces its go down. This ratio is generally believed to be as much as lower. Then we have number of days inventory. This is the time taken by the inventory to replace the go down. It depends upon the inventory turnover ratio. If the inventory turnover ratio is higher, the average time taken by the inventory to replace the go down will be lower. So there is an inverse relationship between these two ratios. Number of days of payables or the average collection period. This is the ratio that tells that how much time the firm takes to pay off its creditors. This ratio has inverse relationship with the creditors turnover ratio. The creditors turnover ratio tells that how many times a firm turns its purchases into an average inventory operating cycle. This ratio tells the time needed by the firm to convert its purchases into cash collected from sales. The formula of this ratio is the inventory turnover ratio plus the receivable turnover ratio. Next we have cash conversion cycle. This is the difference between operating cycle and the average payment period. So we can say that cash conversion cycle tells the time taken from paying to the suppliers to collect cash from the subsequent sales.