A liquid asset is a type of asset that can be converted to cash as required. Liquid assets can be money market instruments, cash, and marketable securities. Both businesses and individuals can use liquid assets and track them depending on their portion of net worth to be used. For ease of financial accounting, liquid assets are calculated as current assets.
The common security assets are securities and cash, which can be transacted to cash immediately. When you consider liquid assets in business, it includes both external reporting and internal performance. A company with a high amount of liquid assets shows a high capability of paying off debt as they become due.
Companies have their ways of balancing cash and how to show them on the balance sheet. However, paying bills and managing the company expenditures are mainly required. Therefore, the banking industry has to hold a certain amount of cash and its equivalent for the company to comply with the standards set by the industry.
A liquid asset can be in the form of cash or an asset that can be converted into cash as required. When considering liquidity, cash is considered legal tender. After this, the assets can be converted to cash, and the asset holder can expect to get the cash in the exchange transaction. Liquid assets are seen as cash and are often called cash equivalents. Therefore, it can be said that the asset can be exchanged anytime for cash.
There are certain factors to consider for a liquid asset to make liquid. It should be done in an established market with readily available buyers in large numbers. Ownership transfer is secured and can be done easily. However, the time taken for cash conversion varies from one case to another.
The common liquid assets are securities and cash that can be easily transacted in place of cash. Therefore, companies will look for assets with cash conversion. When you consider them collectively, these assets are called as company’s current assets. It broadens the liquid assets' scope, including inventory and receivable accounts.
There are several key ratios to analyze liquidity, mainly the solvency ratio. Besides, it is current and quick ratios to consider in measuring the liquidity in the best way possible. In the case of current ratios, it is the current assets that the company uses and its ability to cover up the liabilities with the current assets and survive in challenging situations like pandemics and others.
On the other hand, a quick ratio is a solvency ratio that shows a company’s ability to cover the current liabilities, mostly liquid assets. The ratio will include the accounts receivable.
It is land and real estate investment that are considered to be non-liquid assets. Therefore, it can take months for a company or individual to get the cash from the sale of a non-liquid asset. Therefore, if a company has a real estate property and wishes to liquidate it, it must clear its obligations on time before opting for the investment.
