Liquid Assets – Tips For Determining Liquidity

The terms liquid and exercisable mean essentially the same thing. They refer to the assets that can be converted into cash. If you have an outstanding balance on your credit card then you would probably refer to this as “liquid”. On the other hand, if your balance on your credit card is zero you would probably refer to it as “exercisable”.

Liquidity is defined as being an adequate level of supply to meet expected sales or production. The asset is not lose any (or more) of its value during the process of conversion. Liquid assets are often known as fast assets, as per Wikipedia.

Current liquid assets are those within the best interest of the company. This could mean that they are items the company needs right now, or fast moving materials or inventory that the company needs to purchase quickly to meet a deadline. These types of things tend to have the highest liquidity, which again reflects the highest level of liquidity. Most small businesses do not have cash on hand, which means that they must turn to their liquid assets (cards, store balances, etc.)

Fast converting liquid assets include inventory and materials that can be quickly converted into cash. These are often used for the short term or inventory additions needed just before a seasonal trend begins. Many companies use inventory that is fast converted to stock for immediate usage. Other companies may need (and rarely avail themselves) of these types of liquid assets to meet payroll and thus are constantly looking for ways to convert their fast converting liquid assets quickly into cash.

Exercisable liquid assets are those that, when converted into cash, the potential value is greater than the cost to sell. In most cases, this would be considered a very good value for money. Good examples of expensable liquid assets include inventory (especially if the inventory can be quickly converted to cash), office furniture (for the employee’s comfort and convenience), and supplies (such as paper and ink, which are not considered good for long-term storage, but are very liquid). A company may convert their stock into cash to fulfill their obligations, but in many cases expending that cash is not always the best option. Instead, the company must wait to receive further appreciation from its stock.

Illiquid assets are those that cannot easily converted into cash. Examples of illiquid assets are foreign currency, gold, gemstones, jewelry, artwork, and other collectibles. Usually, it is extremely difficult to sell something that is worth $5 dollars to a buyer who wants to give you just one dollar back. That said, if you have a fairly constant supply of small but easily convertible liquid assets, such as stocks, the ability to convert your small liquid assets quickly into cash, gives you a competitive edge against other business ventures that cannot convert their liquid assets into cash quickly.

To determine the value of your liquid assets, first determine the current value of your business. Add the current value of your accounts receivable and accounts payable, as well as the current value of your inventory. The resulting number, minus your costs of goods sold, are your capitalization ratio. Your capitalization ratio is your company’s percent of equity compared with its total assets. Ideally, the lower the percentage of your equity compared with your total assets, the higher your net worth, or “market value.”

Liquidity is key to any successful business. No matter what line of business you are in, you must keep liquid assets in tact at all times. When businesses experience periods of financial distress, the liquidity of their assets, along with the overall health of the company, becomes an important factor for investors to consider when passing on investment properties. If you are a small business owner who has never thought much about liquid assets, now might be a great time to review your current holdings and make sure that they are as liquid as they can be.