Liquidity is your ability to pay bills when they fall due. It depends on cash actually available, not on profit on paper. A business can be profitable and still fail if money arrives later than it leaves. You measure liquidity by comparing the cash in your accounts with your upcoming payments.
The gap between profit and cash comes from timing. You buy goods in March, sell them in April, and the customer pays in June. Your April profit looks healthy while your June bank account is empty.
An example. You win a €40,000 order with €25,000 of profit in it. You pay your supplier €15,000 on delivery in week 2. The customer pays 60 days after invoicing, which lands in week 12. For ten weeks you are €15,000 short, plus rent and salaries of €6,000 a month. A profitable order has created a €30,000 hole.
Track liquidity with a simple weekly plan: opening cash, expected incoming payments, expected outgoing payments, closing cash. Thirteen weeks ahead is a common horizon. If any week shows a negative closing balance, you have a problem to solve now, not later.
The most common founder mistake is planning with the invoice date instead of the payment date. Customers pay late. Assume 30 to 60 days for business clients and read the terms before you sign.
The second mistake is spending a large incoming payment as if it were profit. Part of it belongs to VAT, part to suppliers, part to taxes you will owe months later. Move those parts to a separate account and treat them as money that is already gone.
