Liquid asset definition
/What is a Liquid Asset?
A liquid asset is any asset that is readily convertible into cash within a short period of time, and which suffers no loss in value as a result of the conversion. Convertibility is assisted by the presence of a large market in which there are many participants, and in which it is easy to transfer ownership from the buyer to the seller. Many organizations want to have a clear understanding of their liquid assets, to see if they can pay for their short-term obligations as they come due.
Types of Liquid Assets
There are several classifications of assets that can be considered liquid assets. They include the following:
Cash. This includes all currencies, except those that are not readily convertible into the currency you need. It can be used immediately to pay bills, make purchases, or cover payroll without any conversion process. Because of its immediate availability, cash is essential for maintaining business operations and meeting short-term obligations.
Marketable securities. These are short-term investments in stocks or bonds that can be easily sold in public markets. They provide a balance between earning returns and maintaining liquidity, as they can be converted to cash quickly.
Accounts receivable. Accounts receivable represent amounts owed to the business by customers for goods or services already delivered. They are considered liquid, especially when due within 30 to 90 days and collected reliably. However, their liquidity depends on customer creditworthiness and the business's collection efficiency.
Life insurance policies with cash surrender values
Precious metals. There is a ready market for most precious metals, so they are usually considered liquid assets.
Is Inventory a Liquid Asset?
In many cases, inventory is not considered a liquid asset, because it may require a significant amount of time to find a buyer. Also, when a business is in a rush to sell its assets, potential buyers may demand a discount before they will accept delivery. In addition, the inventory of many businesses contains a significant amount of obsolete inventory, which can only be sold off at a deep discount (if at all).
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How to Evaluate Liquid Assets
A business that has a large proportion of liquid assets on its balance sheet is better able to pay for its obligations in a timely manner, and so is considered a good credit risk. A lender is more likely to loan funds to an entity with liquid assets, since these assets can be used as collateral on a loan.
Presentation of Liquid Assets
Because liquid assets can be converted into cash on short notice, they are always presented as current assets on an organization’s balance sheet.