Liquidity, Cash Flow and Capital

Liquidity, cash flow and capital play critical roles in ensuring firm solvency, especially during stress scenarios like the 2008 recession, and supporting the growth and performance of a firm. The three terms are often used interchangeably, but they are distinct and serve different purposes for firms. Firms have become insolvent because of inadequate capital, liquidity and/or cash flow, not only causing loss of shareholder value but also shaking confidence in the stability of the financial system.