What Are Liquid Assets? Examples and Characteristics of Liquid Assets
Sometimes in life you need money — and you need it fast. That’s where your assets come in handy. There are a variety of different assets that individuals and companies may own, including current assets, fixed assets, and liquid assets.
Liquid assets are those that can be quickly turned into cash without losing much value, if any at all. Liquid assets can be cash itself, as well as a variety of other things such as money market securities and certain stocks. Both companies and individuals can own liquid assets and use them to determine their overall net worth.
Keeping track of your liquid assets is important in cases where you need money quickly, but it’s also good to know the value of your liquid assets when determining your net worth.
Gain a better understanding of what liquid assets are, including the characteristics of liquid assets, why they’re important to your business, and how to assess the value of your company’s liquid assets.
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Liquid Assets Definition
A liquid assets is a possession that can be quickly and easily converted into cash while retaining its original market value. Also referred to as a “quick asset,” there are no significant fees or penalties associated with converting a liquid asset into cash.
While all of your assets can be liquidated, they won’t all hold their value when you do so. To determine which of your assets are truly liquid, there are a few specific traits you can use to help distinguish them from other kinds of assets.
- Liquid assets can quickly be converted into cash with no minimum fee or loss in total value.
- There is little risk associated with liquid assets.
- Liquid assets provide a relatively low rate of return.
Examples of Liquid Assets
As mentioned, liquid assets are those that are easily converted into cash. While physical cash is the most liquid asset, stocks and bonds are also considered to be liquid assets. They require a more complicated process to convert into cash, but they are still a highly liquid asset that can be accessed in the need for emergency funding.
There are a number of other assets that are considered liquid, including:
- Checking accounts funds.
- Savings account funds.
- Money market accounts.
- Certificates of deposit (CD).
- Demand deposits.
- Marketable securities.
- Mutual funds.
- Promissory notes.
- Prepaid insurance.
- Tax refunds.
- Accounts or notes receivable.
- Other investments that mature in 90 days or less.
Why Are Liquid Assets Important?
Liquid assets are extremely important to a business’s operations for several reasons. For one, if you have liabilities that need to be paid for, liquid assets can quickly and easily be turned into cash.
Similarly, liquid assets become important in emergency instances if you need to acquire funding quickly. Businesses that have a good amount of liquid assets are better equipped to handle emergency situations, like recessions or economic downturns, without suffering from too much impact on day-to-day operations.
Additionally, liquid assets are a vital part of assessing your company’s net worth. When you’re trying to obtain a loan, lenders will assess your asset liquidity to determine whether they should lend to you or not. Liquid assets help bolster a business’s credit, too.
Finally, having an understanding of your business’s liquidity can be impactful in making good business decisions. For instance, if you have a high number of liquid assets, it may be time to convert some of those assets into cash and reinvest them into other aspects of the company, like new buildings and storage or updated equipment.
Liquid Assets vs. Illiquid Assets
Liquid assets are those that can be converted into cash quickly and easily. Illiquid assets can be converted into cash, but it’s more difficult to do so. In fact, non-liquid assets can take several months to convert into tangible cash.
These assets can be things like land, real estate, collectibles, or anything that buyers are not interested in purchasing. Other examples of non-liquid assets that a business might have include:
While high in cash value, illiquid assets are often expensive, too, making them difficult to sell and convert into cash.
Assessing Liquid Assets
For businesses, analyzing the liquidity of your assets is important both internally and externally. From an internal perspective, it’s important to understand how much funding you have in case of an emergency or bills that need to be paid. It’s also important to understand how your assets outweigh your debts.
Externally, assessing the liquidity of your assets is important for determining the success of your business and reporting to stakeholders and board members.
To assess your liquid assets, use the debt to assets ratio formula:
Total Liquid Assets – Total Debts (Liabilities) = Liquid Net Worth.
Total liquid assets should be anything in your checking, savings, and accounts receivable. Your liabilities are anything that you owe, like credit card bills or business loans. This formula assesses how quickly a liquid asset can become cash and cover your current debts without relying on money from future sales or transactions.
The higher the value of your liquid net worth, the more liquid your company’s assets. If your liquid net worth is low, it may be time to reconsider how your assets are allocated so that you can be protected in the event of an emergency.
Liquid assets are vital in emergency situations, both for individuals and businesses. Ensure your portfolio has liquid assets incorporated into the mix to protect yourself and easily access cash when you need it.
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