What do we call it when a business operates with little to no cash reserve?

When a business operates with little to no cash reserve, it is referred to as a liquidity crisis. This term specifically describes a situation where a company is unable to meet its short-term financial obligations due to insufficient liquid assets.

In a liquidity crisis, a business struggles to convert its assets into cash quickly enough to cover immediate expenses, such as payroll, supplier payments, or other operational costs. This state can lead to serious challenges, including the inability to pay debts on time, which can further harm the business's credit rating and operational viability.

The other terms, while they may suggest financial difficulties, do not specifically capture the urgency and specificity of not having adequate cash to meet short-term commitments as effectively as the term “liquidity crisis.” Understanding liquidity crises is critical for business owners and managers, as effective cash flow management is essential to ensuring ongoing operations and avoiding insolvency.