Liquid assets: their explanation, significance, and illustrative cases
In the world of finance, liquidity is a crucial factor that ensures financial stability and flexibility. Liquid assets, as the name suggests, are those that can be quickly and easily converted into cash with minimal costs, providing a solid foundation for liquidity.
For both businesses and individuals, liquid assets play an essential role in managing short-term obligations and emergencies. These assets, which include cash, cash equivalents, and securities traded on exchanges, contribute to strengthening the liquidity of a company or individual.
Cash, the most liquid asset for any entity, is physical currency or money readily available for immediate use. Savings and current accounts, bank balances that can be accessed instantly to cover expenses or investments, are also considered liquid assets. Money market funds and accounts, low-risk, short-term investments, are commonly used by both individuals and companies due to their quick convertibility to cash.
Marketable securities, such as publicly traded stocks, bonds, mutual funds, and exchange-traded funds (ETFs), can be sold within days without significant loss in value, making them liquid assets. Accounts receivable, outstanding payments collectible in the short term, represent cash expected soon and are part of liquid assets for businesses.
Mutual funds, investment pools that individuals can sell their shares in, offer rapid access to funds. Less commonly, some retirement accounts may be considered liquid assets when withdrawals can be made early without major penalties, though this depends on conditions.
In contrast, illiquid assets such as real estate, vehicles, inventory, and collectibles are not considered liquid because they cannot be quickly sold or converted to cash without potential loss.
Liquid assets contribute to more than just access to money. They influence the financial flexibility and agility of both businesses and individuals. Cash balances and bank balances are basic liquid assets used for paying bills and meeting obligations. The ability to convert assets into cash quickly is crucial for financial management and promotes financial stability.
Cash balances and short-term liabilities are relevant for enhancing creditworthiness. The significance of liquid assets extends beyond mere access to money, influencing the financial flexibility and agility of both businesses and individuals.
Individuals can use liquid assets to manage unexpected expenses and secure their quality of life. For businesses, liquid assets are used to make investments, cover unexpected costs, and optimise their cash balances. Monitoring liquid assets is essential to minimise value loss and ensure sufficient liquidity to cover debts.
Money market accounts offer an attractive option for short-term investing with high liquidity. Liquid assets provide a solid foundation for liquidity, contributing to strengthening the financial stability of individuals and businesses alike.
Investing in marketable securities, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs), can help individuals and businesses bolster their liquid assets. Cash, savings accounts, and money market accounts are easily accessible and useful for meeting short-term obligations and managing unexpected expenses.
