What are Liquid Assets: Definition, Examples, and How To Calculate

Liquid assets are essential to a business's financial health as they provide flexibility and financial stability. These assets, which can quickly be converted into cash without significant loss in value, are crucial for meeting short-term obligations, handling unexpected expenses, and seizing opportunities. In this article, you'll find all you need to know about liquid assets.

What Does Liquid Assets Mean in Accounting?

In accounting, liquid assets are assets that can be easily converted into cash without a significant impact on their market value. They are valuable for businesses as they provide rapid access to required funds to cover short-term obligations or unexpected expenses. Liquid assets are essential for evaluating a business's liquidity, which is its ability to pay off current liabilities without selling long-term assets or investments.

Importance of Liquid Assets for Small Businesses

Small businesses often face unexpected financial challenges and are usually unprepared to deal with them, making liquid assets essential. They serve as a quick backup for small businesses, allowing them to quickly convert these assets into cash, which can then be used to cover emergency expenses and obligations.

Liquid assets provide the flexibility that small businesses require in critical situations, preventing them from seeking external debts or interrupting operations. This ability to quickly access cash helps small businesses stay resilient, handle unexpected costs, and maintain stability even when unplanned expenses arise.

Covering Daily Operational Expenses

Liquid assets are essential to cover the business's day-to-day expenses such as rent, utilities, salaries, and supplier payments. Businesses can cover these expenses more easily with liquid assets, especially cash, rather than waiting on receivables or liquidating long-term investments (Illiquid Assets).

Managing Unstable Cashflow

Small businesses may have unstable cashflows, particularly if they rely mainly on client payments. Liquid assets serve as financial support, helping to meet expenses during periods of low cash flow while not interrupting business operations.

Enhancing Financial Credibility

Strong liquid assets boost a business's creditworthiness, making it more appealing to lenders and investors. Lenders prefer organizations with strong liquidity since it indicates stability and the ability to meet short-term obligations. For small businesses, higher creditworthiness means easier access to funding and potentially more favorable loan terms.

Reducing Reliance on Debt

Liquid assets offer readily accessible cash, enabling small businesses to reduce their reliance on loans or credit. This approach minimizes interest expenses and helps avoid the long-term financial commitments associated with debt, leading to greater financial flexibility and stability.

Liquid Assets Examples 

Below are some examples of liquid assets that can help small businesses maintain operational efficiency:

Cash and cash equivalents

Cash is the most straightforward example of a liquid asset since it is available for immediate use. Cash equivalents, such as treasury bills, money market funds, and certificates of deposit (CDs), are also highly liquid investments that may be quickly converted into cash while retaining their market value.

Marketable securities

Stocks and bonds that are publicly traded on financial markets are also considered liquid assets because they may be quickly sold when cash is required, although their value may fluctuate with market conditions. Marketable securities are a great option for businesses to invest excess cash while still maintaining liquidity.

Accounts Receivable

Accounts receivable are money customers owe to the business for products or services received. While it is not as immediate as cash, it is usually collected within a short period. This makes accounts receivable a relatively liquid asset.

Read more: Accounts Receivable Turnover Comprehensive Guide

Inventory

Inventory can be considered a liquid asset in some industries, such as retail if it is in high demand and sells fast at or near its market value. However, inventory is typically less liquid than other assets since it might take longer to sell.

Short-term investments

These assets have a one-year maturity, such as short-term government bonds or commercial paper, and are therefore relatively liquid. Because these assets may be swiftly converted into cash without losing significant value, they provide businesses with an option to store cash in a way that’s both safe and accessible.

How to Calculate Liquid Assets?

To evaluate a business’s liquidity position, we use specific formulas that calculate different aspects of its liquid assets. These formulas help determine the total value of readily available assets, the amount of liquidity remaining after liabilities, and the ratio of liquid assets to current obligations.

Liquid Assets Calculation

We add all easily converted assets into cash to calculate a business's total liquid assets. This includes cash on hand, highly liquid investments, and other assets that can be easily accessible in case of an emergency.

The formula to calculate liquid assets is:

Liquid Assets = Cash and Cash Equivalents + Marketable Securities

Read more: Liquid Assets Formula: A Comprehensive Guide With Example

Net Liquid Assets Calculation

Net liquid assets are the amount of cash and liquid investments after short-term liabilities have been paid. This calculation represents how much liquidity remains after all immediate debts have been paid, providing insight into a business's financial cushion.

The formula for calculating net liquid assets is:

Net Liquid Assets = (Cash + Marketable Securities) - Current Liabilities

Requirements on the Value of Liquid Assets

In some industries, companies are required to maintain a minimum level of liquid assets to ensure financial stability and protect the interests of clients. Regulatory bodies impose these requirements to help businesses meet immediate obligations, manage liabilities, and handle unexpected financial demands.

Liquid assets, such as cash or easily convertible assets, are essential for businesses to maintain financial flexibility, mitigate risks, and support smooth operations. They provide the necessary resources to meet short-term obligations and capitalize on emerging opportunities.

Maintaining Reserved Cash for Emergencies 

Businesses should set aside enough cash or easily liquidated assets to cover emergency expenses. This reserve acts as a safety net during unforeseen situations like economic downturns and unexpected expenses. A common recommendation is to have enough cash to cover at least three to six months of operating expenses, ensuring stability when cash flow is low or unpredictable.

Flexibility for Investment Opportunities

Liquid assets provide companies the ability to invest promptly when opportunities arise. Whether it's acquiring new equipment or growing business departments and staff, having readily available funds helps businesses to make decisions quickly and without the need for long financing processes.

Meeting Desired Liquidity Levels

Maintaining sufficient liquidity levels is critical for businesses to meet their short-term obligations without financial strain. Liquidity measures, such as the current ratio (current assets divided by current liabilities), can help in establishing whether a company has sufficient liquid assets. Achieving and sustaining appropriate liquidity levels helps avoid cash flow issues and supports long-term financial stability.

Readiness for Unexpected Expenses and Obligations

Businesses should always be prepared for unexpected expenses, such as equipment maintenance, legal charges, or emergency operational costs. Businesses that have liquid assets on hand ensure that they can address swiftly these demands without affecting regular operations or resorting to high-interest loans.

Supporting Business Expansion

Growing a business often requires an upfront investment in areas such as new staff members, infrastructure, and technology. Having sufficient liquid assets allows businesses to fund expansion plans without relying on external funding or risking day-to-day operations.

How can Enerpize Help you Maintain Liquid Assets?

Enerpize is an accounting software that simplifies managing liquid assets and essential financial operations. The software helps manage assets, tracks cash flow, expense management, and real-time reporting, helping businesses maintain financial stability and make informed decisions. Here are Enerpize's key features as an online asset management software:

Real-Time Cashflow Tracking

Enerpize helps you to track cash flow in real-time, providing an accurate overview of current cash and liquid assets. This allows companies to stay up to date on how much cash they have on hand, allowing for better planning as well as faster responses to unexpected expenses.

Auto-Generated Balance Sheet

Enerpize automatically generates up-to-date balance sheets, providing a clear overview of the company's assets, including liquid assets and liabilities. This provides reliable, on-demand financial data, allowing businesses to monitor liquidity and make informed decisions.

Streamlined Accounts Receivable Management

Enerpize streamlines accounts receivable management, allowing businesses to collect payments faster and increase cash inflow. This helps to maintain sustainable liquidity while eliminating the need for external financing.

Automated Bank Reconciliation

Enerpize provides an automated bank reconciliation feature to ensure that cash balances in financial records match bank statements. This allows for faster error detection.

Effective Expenses Tracking

The software can track and classify expenses, helping businesses identify opportunities for cost savings and better funds allocation. Effective expense management is critical to maintaining a sufficient level of liquid assets.

FAQs About Liquid Assets

How are Liquid Assets Different From Other Assets?

The distinction between liquid vs illiquid assets or other types lies in how quickly they can be converted into cash without a loss in value. Liquid assets can be accessed or sold with minimal effort, making them ideal for covering short-term obligations and unexpected expenses. In contrast, illiquid assets like property or equipment may require more time and effort to sell, often involving additional costs. This immediate accessibility of liquid assets is crucial for maintaining financial flexibility.

What is Considered a Liquid Asset?

Cash and cash equivalents, such as treasury bills and money market funds, are considered highly liquid assets. Marketable securities, like stocks and bonds, can also be quickly sold, although their value may fluctuate.

Accounts receivable, money owed by customers, is typically collected in a short period, making it relatively liquid. Short-term investments, such as government bonds, are also liquid due to their quick conversion to cash. Inventory can be liquid in industries like retail if it sells quickly at market value, but it is generally less liquid than other assets.

Is a Car a Liquid Asset?

A car is generally not considered a liquid asset because it cannot be quickly converted into cash without significant time and potential loss of value. Selling a car usually involves finding a buyer, which can take time, and the resale price might vary depending on factors such as model and market demand.

Additionally, transaction costs such as advertising and commissions can further reduce the cash received from the sale. Moreover, cars depreciate over time, meaning they may not retain their initial purchase price. Thus, while cars hold value, they do not meet the criteria for liquid assets. So, a car is not a liquid asset.

Is a House an Example of Liquid Assets?

No, houses are considered illiquid assets as it might take a long time to sell a house and convert it into cash. The process of selling property often involves finding a buyer, negotiating terms, and handling legal or regulatory requirements, all of which can delay the conversion to cash.

Are Stocks Liquid Assets?

Yes, stocks are considered liquid assets because they can be quickly converted into cash by selling them on the stock market. The market typically has a large number of buyers, allowing for fast transactions. 

Key Takeaways

• Liquid assets provide businesses with the financial flexibility they require to cover day-to-day expenses and handle unexpected financial challenges.
• Maintaining a sufficient level of liquid assets is crucial for small businesses, as it ensures stability and eliminates the need for external debts.
• Enerpize accounting software can simplify the management of liquid assets by offering real-time tracking, automated reports, and efficient accounts receivable management.
• Understanding and calculating liquid assets allows businesses to evaluate their liquidity status and plan effectively for short-term financial needs.
• Strong liquidity can improve a business's financial credibility, making it easier to secure funding and favorable loan terms when needed.
• A well-managed balance of liquid assets improves a company's flexibility, resilience, and readiness for future expansion.