What is the Degree of Relative Liquidity?

The degree of relative liquidity is the proportion of an organization’s cash flows generated by normal operations that is available for the settlement of its current liabilities. The portion of cash that can be used in this measurement is only the cash available for use in settling obligations within a specific date range. A business that has a lower degree of relative liquidity may have difficulty settling its obligations in a timely manner. Conversely, one that has a high degree of relative liquidity should be considered a good credit risk, and may be able to safely take on additional debt.

It is useful for a creditor or lender to track the degree of relative liquidity of each of its borrowers, to identify those that may have trouble paying their financial obligations in a timely manner. This may lead to further action to selectively reduce the amount of funds outstanding with those borrowers that are having liquidity issues.