Liquid Assets: Definition, Examples & Importance

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 a significant loss of its value.

Generally, liquid assets are traded on well-established markets with a large number of buyers and sellers. The high number of market participants, along with large trading volumes, ensure the fast disposal of the assets without significantly losing value.

Examples of Liquid Assets

• Cash
• Cash equivalents (checking account, savings account, money market account)
• Marketable securitiesMarketable SecuritiesMarketable securities are unrestricted short-term financial instruments that are issued either for equity securities or for debt securities of a publicly listed company. The issuing company creates these instruments for the express purpose of raising funds to further finance business activities and expansion. (stocks, government bonds)

Balance Sheet Treatment

Similar to other assets, liquid assets are reported on the balance sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting. of a company. Assets are listed on the balance sheet in order of liquidity, with the most liquid types listed at the top of the balance sheet and the least liquid listed at the bottom.

Although there is no direct measure of the liquidity of each asset, businesses and market analysts use various financial ratios such as the quick ratioQuick RatioThe Quick Ratio, also known as the Acid-test, measures the ability of a business to pay its short-term liabilities with assets readily convertible into cash and cash ratioCash RatioThe cash ratio, sometimes referred to as the cash asset ratio, is a liquidity metric that indicates a company’s capacity to pay off short-term debt obligations with its cash and cash equivalents. Compared to other liquidity ratios such as the current ratio and quick ratio, the cash ratio is a stricter, more conservative measure 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 protecting a personal investment position against unanticipated adverse events.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Capital StructureCapital StructureCapital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm's capital structure
• Current AssetsCurrent AssetsCurrent assets are all assets that a company expects to convert to cash within one year. They are commonly used to measure the liquidity of a
• Idle CashIdle CashIdle cash is, as the phrase implies, cash that is idle or is not being used in a way that can increase the value of a business. It means that the cash is not earning interest from sitting in savings or a checking account, and is not generating a profit in the form of asset purchases or investments. The cash is simply sitting in a form where it does not appreciate.
• Liquidity EventLiquidity EventA liquidity event is a process by which an investor liquidates their investment position in a private company and exchanges it for cash. The main purpose of a liquidity event is the transfer of an illiquid asset (an investment in a private company) into the most liquid asset – cash.