Liquid assets are generally accounted for Receivables, marketable securities and cash that can be converted readily to cash at their estimated current value.
Some of the most common examples of liquid assets include:
The net Liquid asset’s amount is one of the many measures that provide a snapshot of a firm’s financial condition. Marketable securities and cash are ready to be deployed. On the other hand, accounts receivables can be converted into cash in a short period. As far as inventory is concerned, it is not qualified as a liquid asset as it cannot be sold readily without any substantial discount. Current liabilities primarily incorporate:
Subtracting current liabilities from liquid assets displays a company’s financial flexibility to make instant payments.
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Here are some noteworthy advantages of net liquid assets:
Keep in mind that there should be a balance between the company striking enough liquid assets and a lot of liquid assets. The general rule of thumb is that the firm should have a minimum of six months of liquid assets to fulfil short-term obligations and cover all operating expenses. If that can be done, the company is said to be financially good.
Let’s understand this with an example of net liquid assets. Suppose ABC Incorporations has the following parts on its Balance Sheet for current liabilities and current assets:
So, the net liquid assets would be:
Cash + Accounts Receivables – Current Liabilities =
Rs. 22.7 million + Rs. 29.5 million – Rs. 138.5 million = Rs. (-) 86.3 million.
The negative position of net liquid for a company could be a matter of concern. However, such a situation is quite common for a retailer. Still, it reflects that the firm is not in its best financial position.
Net liquid assets are important as a firm constantly requires cash to meet obligations. Without adequate cash, a firm cannot pay its employees' salaries or bills to vendors. Liquid assets are also required during short-term emergency.
Undoubtedly, a liquid asset is a thing of future economic benefit to a firm that can be easily exchanged for cash. If you are an owner of a firm or are responsible for the finances, make sure your company has enough net liquid assets to tackle every possible situation.