What does the term "liquidation" refer to in finance?

The term "liquidation" in finance specifically refers to the process of selling off assets. This often occurs when a business is winding down its operations or when a company is unable to meet its financial obligations. During liquidation, the assets of the company—be they physical assets like property and equipment or financial assets like stocks and bonds—are sold to generate cash. The proceeds from these sales are typically used to pay off creditors, and any remaining funds are distributed to shareholders if applicable.

This concept is particularly relevant in scenarios such as bankruptcy, where the liquidation of assets is a critical step in settling debts. Liquidation can also happen in a more informal context, such as in the selling off of inventory during a business's closing sale. Overall, it signifies the conversion of non-liquid assets into cash, highlighting the importance of asset management and financial strategy within businesses.