An entity is considered to be illiquid when it does not have sufficient cash or access to cash to pay its short-term obligations. Illiquidity can be a temporary condition, such as when a firm expects to collect a large receivable in the near future. The condition can also arise when a large expenditure is made, such as when a major fixed asset or another business is purchased. In other cases, illiquidity stems from an ongoing decline in the fortunes of a business for any number of reasons, which eventually results in the bankruptcy of the organization.

The concept also applies to individual assets, when they cannot be easily sold and thereby converted into cash. This condition arises when there is not a ready market for the assets and few potential buyers.