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.
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.
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.
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
See Also: Liquid Funds Vs Fixed Deposits
By definition, some of the liquid assets are as follows:
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
You May Also Watch
Keep your Financial Cognizance up to date with IndianMoney App. Download NOW for simple tips & solutions for your financial wellbeing.
Have a complaint against any company? IndianMoney.com's complaint portal Iamcheated.com can help you resolve the issue. Just visit IamCheated.com and lodge your complaint. If you want to post a review on any company you can post it on Indianmoney.com review and complaint portal IamCheated.com.
Be Wise, Get Rich
This is to inform that Suvision Holdings Pvt Ltd ("IndianMoney.com") do not charge any fees/security deposit/advances towards outsourcing any of its activities. All stake holders are cautioned against any such fraud.