What Is a Liquid Asset?

Liquid assets include cash, 澳洲幸运5开奖号码历史查询:money market instruments, short-term bonds, marketable securities, and other investments that can be exchanged for cash relatively quickly and without losing much value. Individuals and businesses track liquid assets as a portion of their 澳洲幸运5开奖号码历史查询:net worth.

A company’s liquid assets are repor💟ted on its balance sheet as current assets for the purposes of financial accounting.

Understanding Liquid Assets

A liquid asset is cash on hand or an asset that can be easily converted to cash. In terms of liquidity, cash is supreme, since cash as 澳洲幸运5开奖号码历史查询:legal tender i🔯s the ultimate goal. Assets that can be converted to cash qui✤ckly are similar to cash itself and are thus also liquid.

Liquid assets are often viewed as cash, and likewise may be🧜 called cash equivalents because the owner is confident the assets can easily be exchanged for cash at any time.

Generally, several factors must exist for a liquid asset to be considered liquid. It must be in an established, 澳洲幸运5开奖号码历史查询:liquid market with a large number of readily available buyers. Ownership transfer must also be secure and easily facilitated. In some cases, the amount of time𝄹 to cash conversion will vary.

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.

Balance sheet accounting

In financial accounting, the balance sheet breaks assets down as current or long-term with a hierarchical method in accordance to liquidity. A company’s current assets are assets a company looks to for cash conversion within a one-year period. Current assets have different liquidity conversion time🦩frames depending on the type of asset. Cash on hand is considered the most liquid type of liquid asset since it is cash itself.

On the balance sheet, assets become less liquid by their hierarchy. As such, the long-term assets portion of the balance sheet includes non-liquid assets. These assets are expected for cash conversion in one year or more. Land, 澳洲幸运5开奖号码历史查询:real estate investmentౠs, equipment, and machinery are considered types of non-liquid assets because they take time to convert to 𓃲cash, costs can be incurred to convert them to cash, and they may not convert to cash at all.

Examples of Liquid Assets

Here are a few examples of liquid assets held by 🐈both individuals and businesses.

Cash and cash equivalents

Cash is the most liquid asset possible. This in𒐪cludes physical cash, savings account balances, and checking account balances. It also includes cash from foreign countries, though some foreign currency may be difficult to convert to a more local currency.

Cash equivalents are other asset holdings that may be treated similar as cash due to their low risk (or insurance coverage) and short-term duration. Examples of cash equivalents include 澳洲幸运5开奖号码历史查询:Treasury bills, Treasury notes, 澳洲幸运5开奖号码历史查询:commercial paper, 澳洲幸运5开奖号码历史查询:certificates of deposit (CDs), and money market funds. Note that some items may have less liquidity based on the terms of the vehicle. For example, some CDs can not be broken or require a substantial penalty for early termination.

Marketable securities

Some marketable securities are considered liquid based on the underlying asset. Examples may include stocks, bonds, preferred shares of stock, 澳洲幸运5开奖号码历史查询:index funds, or 澳洲幸运5开奖号码历史查询:exchange-traded funds (ETFs). Other instruments may include futures or options.

A critical part of understanding the liquidity of marketable securities is their holding duration. Liquid assets must be convertible to cash quickly. Depending on the nature of the security, this isn't always possible. Also, be mindful that certain investments must be reported on the balance sheet as long-term assets and are not technically considered current assets.

Accounts receivable

Accounts receivable are a controversial type of liquid asset. On one hand, a company has a legal claim to cash that is due to them often as part of their business operations. A customer may have bought something on credit, so after the credit term is 🍃up, the company is d꧒ue to receive cash.

On the other hand, accounts receivable balances may go uncollected. It may also take an unforeseeably long amount of time to collect payment from a delinquent client. When considering liquid assets, be aware that a company may not collect all of its accounts receivable balance. For this reason, liquid asset analysis may include the contra asset 澳洲幸运5开奖号码历史查询:allowable for doubtful accounts balance to reduce accounts receivable to only what the company thinks they will collect.

Inventory

Another difficult current asset to assess is 澳洲幸运5开奖号码历史查询:inventory. In some situations, inventory may be considered a liquid asset if it has a large market with highly visible marketplaces for a product in high demand. Consider the latest iPho♔ne: any models being recorded as inventory may quickly be demanded by the market.

Alternatively, what if demand for the iPhone sours? What if a new m﷽odel comes out, and Apple is stuck with obsolescent inventory? What if primary warehouses are broken into and most of the inventory stolen? In theory, inventory is a liquid asset because it gets converted to cash as part of normal business operations. However, should business slow in a recession or any of the above events occur, inventory may🐓 not be liquid.

Analyzing Liquid Assets

In business, liquid ass﷽ets are important to manage for🎃 both internal performance and external reporting. A company with more liquid assets has a greater capability of paying debt obligations as they become due.

Companies have strategic proc😼esses for managing the amount of cash on their balance sheet available to pay bills and manage required expenditures. Industries like bankin💟g have a required amount of cash and cash equivalents that the company must hold to comply with industry regulations.

There are several key ratios analysts use to analyze liquidity, often called solvency ratios. Two of the most common are the 澳洲幸运5开奖号码历史查询:quick ratio and the 澳洲幸运5开奖号码历史查询:current ratio. With the current ratio, current assets♒ are used to assess a company’s ability to cover its current liabilities with all of its current assets and to survive unplanned and 🦩special circumstances, like a pandemic.

The quick ratio is a more stringent solvency ratio that looks at a company’s ability to cover 🍰its current liabilities with just its most liquid assets. The quick ratio does include accounts receivable.

Liquid and Non-Liquid Markets

Both individuals and businesses deal with liquid and non-liquid markets. The ease of conversion to cash generally separates the distinction of a liquid vs. non-liquid market, but there can also be some other c🧸onsiderations.

A liquid asset must have an established market in which enough buyers and sellers exist so that an asset can easily be converted to cash. The market price of the asset should also not be significantly changed, resulting in less lꦇiquidity or greater illiquidity for subsequent market participants.

The 澳洲幸运5开奖号码历史查询:stock market is an example of a liquid market because of its large number of buyers and sellers which results in easy conversion to cash. Because stocks can be sold using electronic markets for full market prices on demand, publicly listed equity securities are liquid assets. Liไquidity can vary by security, however, based on market capitalization and average share volume transactions.

The 澳洲幸运5开奖号码历史查询:foreign exchange market is deemed to be the most 澳洲幸运5开奖号码历史查询:liquid market in the world because it hosts the exchange of trillions of dollars each day, 24 hours a day, making it impossible for any one individual to influence the exchange rate. Other liquid markets include commod💧ities and secondary market debt.

Illiquid markets

Illiquid markets have their own considerations and constraints. These factors can be important for individuals and invꦕestors when allocating for liquid vs. non-liquid assets and making investꦿment decisions.

For example, a 澳洲幸运5开奖号码历史查询:real estate own꧋er may wish to sell a property to pay off debt obligations. Real estate liquidity can vary depending on the property and market, but it's not a liquid market, like stocks. As such, the property owner may need to accept a lower price in order to sell the property quickly. A quick sale can have some negative effects on the market liquidity overall and will not always generate the full market value expected.

Requirements for Value of Liquid Assets

Some companies or entities may face requirements for the value of liquid assets. This restriction is to ens𓂃ure the short-t🏅erm health of the company and protection of its clients.

The U.S. Department of Housing and Urban Development (HUD) has outlined liquid asset requirements for financial institutions to become FHA-approved lenders. For example, non-supervised mortgagees must possess a minimum of $200,000 of liquid assets at all times.

The Federal Deposit Insurance Corporation (FDIC) stipulates the level of unencumbered liquid assets lending institutions must have on hand. It also outlines situations when institutions are required to have more liquid assets, such as when recent trends show substantial reductions in large liability accounts, the loan portfolio includes a high volume of non-marketable loans, or the institution's access to capital markets is impaired.

The Bottom Line

Liquid assets help a company meet its short-term debt obligations because they can be quickly converted to cash. Companies earning a tremendous amount of profit may still face liquidity problems if they don't have the short-term resources to pay bills, so it's worth keeping an eye on liquid assets.