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What are Liquid Assets? Why Liquid Assets is Essential for the Business?

IndianMoney.com Research Team | Posted On Friday, December 20,2019, 03:16 PM

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What are Liquid Assets? Why Liquid Assets is Essential for the Business?

 

 

Cash can be considered to be the bloodline of any business. Thus, Liquid assets are known to provide stability to the business structure and ensure the continuation of business operations. Liquid assets are important as they give quick access to funds to pay off any liabilities that are coming due.

It is an important part of the financial profile of a business entity. Let’s take a closer look at how they play a crucial role for the businesses.

What are Liquid Assets?

Liquid assets refer to those assets that can be easily converted into cash. Liquid assets are easy to sell and can be readily converted into cash without any loss in its value. 

Liquid assets help companies and businesses avail cash to meet their business obligations. While investing, businesses must invest in some liquid assets so that they can readily meet their fund requirements during an emergency. Cash is the highest form of liquid asset followed by current accounts, government bonds, treasury bills etc.

See Also: Best Liquid Funds 2019: Top 10 Liquid Funds

Importance of Liquid Assets:

A business is required to maintain a small reserve of liquid assets for the purpose of meeting its short-term liabilities. Current liabilities that come due within a year can be timely met when a business has enough liquid assets. These can be quickly converted into cash without any loss in their value.

Businesses often measure their liquidity by comparing the amount of liquid assets it possesses with the total amount of its current liabilities. This is known as the quick ratio. A lower quick ratio means there is a shortage of liquid assets and thus the business may face a liquidity problem while covering its short-term liabilities.

See Also: What Are Liquid Funds? Is It Good To Invest In Liquid Funds?

Liquid Assets Formula:

Calculating the liquid net worth is essential for small businesses as they can cover unexpected expenses through this. This information is also useful for lenders as they can make informed decisions as to whether they should lend money to a business or not. A higher net worth makes you eligible in the eyes of lenders and a higher net worth means you can pay back your loans easily.

The following equation is used to calculate the liquid net worth of businesses:

Total liquid assets – total debt (liabilities) = total net worth

  • Here total liquid assets denote the total assets held by a business entity like cash and account receivables
  • Total liabilities stand for the total debt i.e. credit card debt, total mortgage or unsecured loans etc.

See Also: Liquid Funds Vs Fixed Deposits

List of Liquid Assets:

By definition, some of the liquid assets are as follows:

  • Current accounts
  • Bank notes
  • Account receivables
  • Demand deposits
  • Pre-paid insurance
  • Securities that mature within 90 days
  • Inventory
  • Stocks and mutual funds

Why Liquid Assets is Essential for the Business?

Liquidity is important when it comes to financing businesses. Big and small businesses can avail easy cash and meet emergency financial requirements. It is a means through which businesses can easily convert their assets into cash without losing its value. Liquid assets are a part of the business working capital that must be maintained to pay for business operations and its expenses.

Businesses with more liquid assets are viewed as better investment opportunities by credit institutions. Such businesses have a better potential to pay back business loans. Liquidity in business is also important to tackle economic situations like a recession or inflation. All small businesses must have liquid asset reserves to cover business obligations for 2-3 months.

However, it is important to keep liquidity in control. If your business is suffering from high liquidity then it is important to bring cash into the business to help it to grow. But if your liquidity is low, you may face trouble.

See Also: Liquid Funds vs Debt Funds

Benefits of Liquid Assets:

  • Liquid assets help businesses take care of business liabilities and short-term liabilities.
  • Liquid assets are important to handle emergency financial needs. For example, if you need emergency funds you will not have the time to sell your house as you need quick access to funds.
  • Liquidity is important when a business entity applies for loans. Creditors assess the liquid assets owned by the business to determine their creditworthiness. If a company has enough liquid asset reserves then they are likely to pay off a mortgage easily even if they face temporary financial trouble.
  • Lastly, having an adequate amount of liquid assets is important to achieve a healthy financial profile. Having access to cash means the entity can tide through a financial crisis easily.

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