Liquidity
In one sentenceThe business's ability to pay its short-term obligations on time from cash or from assets that are easy to turn into cash.
Simply put
Liquidity asks one question: when a payment falls due, will you find the money? Cash on hand and in the bank is the most liquid, then receivables, then inventory, because it has to be sold first.
A business can be profitable and short of liquidity at the same time, if its profit is tied up in inventory or with customers. That is why you measure it with ratios such as the current ratio, the quick ratio and the cash ratio.
Example
A contracting business made a profit on a large project, but the project owner has not yet paid what it owes, so it was late paying its workers' salaries. The profit is there in the income statement; the problem is liquidity.
Don't confuse it with
ProfitabilityProfitability measures whether you earn more than you spend during the period, and liquidity measures whether cash is available when each obligation falls due.