Sometimes we need to get our hands on cash in a hurry. This can not only be important for the individual but also for a business. Most of us will have different assets at our disposal, but it is not always possible to turn these into cash when we need to. Those assets that we can easily covert into currency are referred to as liquid assets. These also will usually be an asset that can be converted into money without any significant loss within a period of 20 days. For instance, you would probably have no problem turning your home into cash quickly if you dropped the price low enough, but this doesn’t really mean that the asset is liquid.
It is also possible to talk about product liquidity. This refers to the ease by which it is possible to turn a product into cash. Some products like jewelry and gold may be easily turned into cash without any loss to their value. It usually takes longer than 20 days to sell a house so this would to be considered to have less product liquidity.
The Importance of Liquid Assets
Most business will need some cash on hand in order to survive. Bills need to pay and there can sometimes be unexpected problems that arise that require cash. If the business has all their wealth tied up in non-liquid assets then this could put their operation in jeopardy. It is conceivable that a company could go under because they just did not have enough cash on hand.
Types of Liquid Assets
There are a number of different types of liquid assets and these can include such things as:
- Currency is the most popular type of liquid asset and this includes all coins and notes.
- Any money that is held in a current or savings account would be considered liquid. This is because it can easily be turned into cash should the need arise. Many accounts also come with a debit card which means that turning this asset into cash is easier than ever. Investment type of accounts where the money is to be untouched for a long time are not considered liquid.
- Stocks or bonds
- Any lump sum payments due in the next 20 days
Examples of non-liquid assets include private property, land, building, and money tied up in long-term investments.
Some Final Thoughts on Liquid Assets
Having assets that can be easily turned into cash is important for individuals as well as businesses. This is why tying up too many assets that can’t be easily made liquid can be a mistake. For instance, if an individual invests all their money in savings account that they can’t touch for five years they may find it hard to pay their day to day bills. They will then be left with the choice of struggling along or potentially paying a large financial penalty to get their cash back. A business will face similar choices when they put too much of their assets into a form that can’t easily be turned into cash.