What are liquid assets, and why are they beneficial to a business?

A company’s liquid asset total also impacts a number of key financial ratios. Companies use metrics such as the cash, current and quick ratio to assess how well the business manages its money. Financial institutions look at these ratios when evaluating a business as a candidate for a loan. Investors look at these liquidity ratios as indicators of a company’s financial health and stability.

Examples of illiquid assets

A liquid asset means an asset that can be easily and quickly converted into cash on hand, without significantly losing market value. A few other liquid asset examples include stocks, bonds, and money in a bank account. Cash on hand is considered to be a liquid asset because it can be readily accessed. The money in your checking account, savings account, or money market account is considered liquid because it can be withdrawn easily to settle liabilities. Real estate is generally not considered a liquid asset since it cannot be quickly converted into cash. Unlike stocks and bonds, real estate investments are not fungible, and selling involves a lengthier, more complex, and expensive process.

Liquid Assets in Business

Liquid assets are usually current assets that can be converted to cash quickly while retaining their market value. These assets comprise the current asset portion of your balance sheet and are expected to be converted or used within a year. Current assets have their own section in the balance sheet and are the first account to be recorded in it. Liquid assets don’t have a separate section in the balance sheet and are listed under current assets. If the pandemic taught us anything, it is that businesses must always maintain a healthy level of liquidity to be prepared for emergencies and unpredictable challenges. Liquidity in business and during financial emergency is measured in terms of assets, and liquid assets are essential for good financial health.

• Above and beyond your checking account, you should hold some liquid assets so you can rapidly get cash when you need it most.
• Tangible assets are physical in nature, and have a material value on the public market that can be easily ascertained.
• A liquid asset is cash on hand or an asset that can be easily converted to cash.
• Unlike stocks and bonds, real estate investments are not fungible, and selling involves a lengthier, more complex, and expensive process.
• While employee stock options can be a valuable form of compensation, they may also be highly non-liquid.

What investments are considered liquid?

Having the right banking partner can help you keep your cash secure and earning interest.

Balance Sheet Accounting

In corporate finance, liquid assets are those that can be used to pay off debts in a hurry. The most common examples of liquid assets are cash – on-hand or deposited in a bank – and marketable securities such as stocks and bonds. The most liquid assets are cash and securities that can immediately be transacted for cash. Companies can also look to assets with a cash conversion expectation of one year or less as liquid. Collectively, these assets are known as a company’s current assets. This broadens the scope of liquid assets to include accounts receivable and inventory.

• Holding some of your total net worth in the form of liquid assets is a key part of sound long-term financial planning.
• Envision what you might need in the event of a crisis (e.g., a job loss, divorce, health event, and so on).
• The time it takes to find a broker, shortlist a buyer, negotiate the right price, draw up the documents, and sign the contract might go up to a few years.
• Unlike liquid assets that can be easily and quickly sold for cash, non-liquid assets or illiquid assets are more difficult to convert into cash.
• To explore this concept, consider the following liquid assets definition.
• Total liabilities means debts such as credit card debt, your mortgage or unsecured loans (not protected by a guarantor).

She has contributed to numerous outlets, including NPR, Marketwatch, U.S. News & World Report and HuffPost. Miranda is completing her MBA and lives in Idaho, where she enjoys spending time with her son playing board games, travel and the outdoors. If you have money in a certificate of deposit or CD, this might be considered semi-liquid because your money isn’t available until the official withdrawal date. You can withdraw money if you need it, but if you’re doing so before the maturity date, you’ll likely pay a penalty. By contrast, you probably couldn’t sell your vintage what is the meaning of liquid assets watch collection that fast, and even if you could, there are a number of factors that might influence how much cash value you might obtain from the sale. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

It may be best to think of liquidity as a spectrum — different assets will have varying levels of liquidity. And within each asset class, certain assets may be more liquid than others. For instance, certain types of bonds (treasuries) may be more liquid than other types. “A liquid asset is something you can pay rent with next month,” says Jedidiah Collins, CFP, founder and CEO of Money Vehicle.

Illiquid Assets:

Companies must also assess and manage their liquidity to ensure that they can pay short-term and long-term debt obligations, prepare for unexpected events, and seize sudden financial opportunities. Liquid investments can play a surprisingly important role in your financial wellbeing. Having ready access to cash can help you pay off debt, cover a crisis, or be able to invest in new opportunities. One good way to build liquidity is to set money aside every week or month. Or you might have a set savings amount auto-deducted from each paycheck. You could keep the funds in a high-yield savings account to help them grow.

These assets can be transformed into cash rapidly, with a negligible effect on the price available in the entire market. Such assets comprise government bonds and money market instruments. Overall, understanding and managing liquid assets effectively are essential for both individuals and businesses to maintain financial stability, seize opportunities, and navigate economic uncertainties. Inventory is typically excluded from the list of liquid assets, but it can be considered liquid assets if there is a large market and high demand for it. However, if inventory is made up of goods that have gone obsolete due to a sharp drop in demand or a market recession, then it cannot be called a liquid asset. Liquid assets can be easily converted into cash, whereas fixed assets are tangible assets owned by a company used to generate income over the long term.

•   Maintaining liquid assets is important for calculating net worth, applying for loans, and ensuring a business can handle emergencies or market fluctuations effectively. Learn more about what fixed assets are and what’s considered a fixed asset in this article. Such high quality liquid assets typically have a market that is also liquid and has a lot of demand.

A liquid asset is an easily convertible asset that can be swiftly turned into cash without incurring substantial losses. Both individuals and businesses utilize liquid assets to address short-term financial obligations, navigate financial uncertainties, obtain credit, and promptly settle liabilities. In financial accounting, a firm’s liquid assets are categorized as current assets on its balance sheet. This distinction is crucial as it highlights the assets readily available for meeting immediate financial needs. In contrast, non-liquid assets like vehicles, property, or jewelry may take longer to sell and may incur losses in the process. Striking a balance between liquid and non-liquid assets is essential for firms to ensure both liquidity and overall financial stability.