What is a Liquid Asset?
A liquid asset is cash on hand or an asset other than cash that can be quickly converted into cash at a reasonable price. In other words, a liquid asset can be quickly sold on the market without significant losses on its value.
Generally, liquid assets are traded on well-established markets with a large number of buyers and sellers. The market participants, as well as the large trading volumes, ensure the fast disposal of the assets without significantly losing value.
Examples of Liquid Assets
- Cash equivalents (checking account, savings account, money market account)
- Marketable securities (stocks, government bonds)
Balance Sheet Treatment
Similar to other assets, liquid assets are reported on the balance sheet of a company. Note that on the balance sheet, the assets are listed relative to their liquidity level, with the most liquid types listed on the top of the balance sheet and the least liquid listed at the bottom.
Although there is no direct measure of liquidity of each asset, businesses and market analysts use various financial ratios such as quick ratio and cash ratio to identify the overall level of liquidity of a company.
Importance of Liquid Assets
Liquidity is one of the key factors that determine success in the world of business. Liquid assets ensure a company’s ability to meet its immediate financial obligations and operating expenses. In addition, the assets serve as the company’s protection from unforeseen adverse events such as a recession or a sudden decline in demand for the company’s products or services. Finally, their presence directly improves the company’s ability to seek additional financing.
Liquid assets are important in personal finance as well. Generally, it is not recommended to exclude such assets from a personal investment portfolio. Similar to business applications, liquid assets in personal finance are utilized to meet financial obligations as soon as possible. In addition, they are also used in hedging a personal financial position against unanticipated adverse events.
Thank you for reading CFI’s guide to liquid assets. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: