Liquid Assets Formula: A Comprehensive Guide With Example

Understanding how to calculate liquid assets is critical for evaluating the financial health of any business or individual. Liquid assets are those resources that can be quickly converted into cash to meet immediate financial needs. These assets typically include cash, cash equivalents, and marketable securities that are easily tradable in the market.

The liquid assets formula is simple but essential for determining a company’s ability to cover short-term obligations. It’s calculated by adding together cash, cash equivalents, and marketable securities. This calculation helps businesses assess their liquidity and how easily they can access cash to meet expenses, pay debts, or handle unexpected costs. 

What is Liquid Assets Formula?

Calculating liquid assets involves a straightforward formula that measures a company’s ability to meet its short-term obligations using its most accessible resources. The formula focuses on highly liquid assets, such as cash and marketable securities, which can be quickly converted into cash without significant loss of value.

This formula can be defined as follows:

Liquid Assets = Cash and Cash Equivalents + Marketable Securities

• Cash and Cash Equivalents refer to actual cash on hand or in a bank account, as well as highly liquid short-term investments that are easily accessible such as checking accounts, savings accounts, and certificates of deposit (CDs).
• Marketable Securities are short-term investments that can be quickly converted into cash, such as publicly traded stocks, bonds, and other financial instruments that can be easily sold.

Read Also: What is the Difference Between Liquid and Illiquid Assets?

Importance of Calculating Liquid Assets

Calculating liquid assets is important because it helps businesses determine their short-term financial health and meet immediate obligations. It indicates how much readily available cash or easily convertible assets a business possesses to meet its current liabilities.

Knowing a company's liquid asset position allows it to manage cash flow risks better and avoid problems with bill payment or debt servicing. Accurately calculated liquid assets boost financial stability and business credibility since having more liquid assets indicates good financial stability and minimizes the danger of insolvency or failure in the short term.

Furthermore, investors and creditors often use liquid assets to determine if a business can weather financial challenges or downturns, which helps in investment decisions or lending assessments.

Example of Calculating Liquid Assets

A software development company needs to determine its ability to meet short-term obligations. The company has $30,000 in its bank account and possesses stocks and bonds worth $40,000. 

The company has the following financial details:

• Cash: $30,000 (available amount in the bank)
• Marketable Securities: $40,000 (Stocks and Bonds that can be quickly sold for cash)

The formula for calculating liquid assets is:

Cash and Cash Equivalents + Marketable Securities

$40,000 + $30,000 = $70,000

The company has $70,000 in liquid assets available which means that the company can comfortably meet its immediate financial obligations.

Net Liquid Assets Formula

The formula for net liquid assets represents the amount of easily accessible liquid assets a company or individual has, after subtracting immediate financial obligations (current liabilities). It provides an overview of liquidity, showing how many cash resources are available to cover short-term debts.

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

The formula essentially calculates how much liquidity is available after covering short-term obligations. It's an important metric for understanding an organization’s ability to manage day-to-day operations without facing liquidity issues.

 

Example of Net Liquid Assets Calculation

A digital marketing agency needs to determine its ability to meet short-term obligations. The company has $50,000 in its bank account and possesses stocks and bonds worth $30,000. It also owes one of its suppliers $40,000.

The company has the following financial details:

• Cash: $50,000 (available amount in the bank)
• Marketable Securities: $30,000 (Stocks and Bonds that can be quickly sold for cash)
• Current Liabilities: $40,000 (Accounts Payable)

The formula for calculating net liquid assets is:

• (Marketable Securities + Cash) – Current Liabilities
• ($50,000 + $30,000) - $40,000 = $40,000

The company has $40,000 in liquid assets available after covering its $40,000 in short-term obligations. This means the company can comfortably meet its immediate financial obligations and still have a balance of liquid assets.

 Liquid Assets Ratio Formula

The liquid assets ratio is a financial metric that assesses a company's ability to meet its short-term liabilities using its most liquid assets. A specific type of liquidity ratio, it focuses on the proportion of short-term debt that can be covered by cash, cash equivalents, and marketable securities. A higher ratio is generally seen as favorable, as it indicates the company is better positioned to fulfill its short-term obligations.

Liquid Assets Ratio = Liquid Assets ÷ Current Liabilities

Liquid assets refer to the total of cash, cash equivalents, and marketable securities (the same items used in the calculation for net liquid assets). Current Liabilities as mentioned before are the obligations that need to be settled within a short period.

Implications of Different Liquid Assets Ratios

• A ratio of 1.0 indicates that the company has exactly enough liquid assets to meet its current liabilities.
• A ratio greater than 1.0 indicates that the company has more than enough liquid assets to cover its short-term obligations.

• If the ratio is less than 1.0, it means that the company's liquid assets are insufficient to fulfill its current liabilities, which might indicate liquidity issues.

   

Example of Liquid Assets Ratio Formula

Let's consider a construction company that is assessing its liquidity position. The company has the following liquid assets:

• Cash: $40,000 in cash available in its bank account,
• Cash Equivalents: $30,000 in the form of short-term investments,
• Marketable Securities: $20,000.

In total, the company's liquid assets amount to $90,000. On the other side, the company has $90,000 in short-term liabilities, which it needs to settle within the next 12 months, such as outstanding invoices, payroll, and other operational expenses.

Liquid Assets Ratio = (40,000 + 30,000 + 20,000) ÷ 90,000

Liquid Assets Ratio = 1

Streamline Calculating Liquid Assets With Enerpize

Enerpize, a powerful and comprehensive accounting software, simplifies the calculation of liquid assets by automatically tracking and accumulating key financial resources such as cash, cash equivalents, and marketable securities. With Enerpize, you can effortlessly keep track of your company's most liquid assets, providing you with real-time insights into your financial health and liquidity position.

This online asset management software makes it easy to calculate your liquid assets, ensuring you have an accurate and up-to-date view of your company’s ability to meet short-term obligations. Enerpize allows you to monitor cash flow, track current liabilities, and generate detailed liquidity reports all in one platform. By automating these processes, Enerpize saves valuable time and significantly reduces the risk of manual errors, improving the accuracy of your financial reporting. 

Whether you're managing day-to-day finances or preparing for future growth, Enerpize helps ensure your company's liquidity remains strong, giving you the confidence to make informed decisions and maintain financial stability.

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FAQs About Calculating Liquid Assets

How do I calculate my liquid assets?

To calculate your liquid assets, add together the following formula components:

• Cash: The actual money you have on hand or in your bank accounts.
• Cash Equivalents: Short-term investments that are easily convertible to cash, like money market funds or treasury bills.
• Marketable Securities: Stocks, bonds, or other financial instruments that can be quickly sold for cash.

So, calculating liquid assets requires following the formula below:

Liquid Assets = Cash + Cash Equivalents + Marketable Securities

How to Find Liquid Assets from the Balance Sheet?

To find liquid assets from a business's balance sheet, focus on the items that represent cash or assets that can quickly be converted into cash. Here are a few examples:

• Look for Cash and Cash Equivalents:
  • Cash: This includes physical cash, checking accounts, and any other forms of readily available cash.
  • Cash Equivalents: These are short-term, highly liquid investments, such as money market funds or short-term Treasury bills, that can be quickly converted into cash with minimal risk.
• Find Marketable Securities: These are investments that can be sold or liquidated quickly, such as stocks, bonds, or certificates of deposit (CDs). They are listed under "Current Assets" on the balance sheet.
• Check for any other liquid assets: Occasionally, some companies may hold other assets considered liquid (like accounts receivables that are expected to be collected in the short term).