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To figure out the meaning of liquid assets, it is important to first understand liquidity. Liquidity is a company’s ability to convert its assets into cash without losing their value. The easier it is to convert an asset into cash, the more liquid it is, and vice-versa.

  1. They are in a position to weather the storm by relying on its liquid assets to continue paying its short-term obligations even if business is not booming.
  2. The negative net liquid position of the company may be a concern, but this situation is typical for a retailer.
  3. In most cases, investments and investment accounts are considered liquid assets.

That is, they’re things like stocks, or other easily sold securities such as US Treasury bonds. Cash, of course, also fits the bill, as it can be used by anyone at any time. It may also take an unforeseeably long amount of time to collect payment from a delinquent client.

This broadens the scope of liquid assets to include accounts receivable and inventory. A liquid asset is an item of future economic benefit to a company that can easily be exchanged for cash. Examples of illiquid assets would include real estate & land, vehicles, equipment & machinery, and certain over-the-counter (OTC) securities, among others. The purest form of financial assets is cash and cash equivalents—checking accounts, savings accounts, and money market accounts. Liquid accounts are easily turned into funds for paying bills and covering financial emergencies or pressing demands.

This article answers this basic but important question that is central to paying a sound foundation for your business. Building your liquid assets essentially means that you’re giving yourself a financial insurance plan. In the case of an emergency, you’ll have money on hand to cover yourself and/or your loved ones through any major or unexpected incidents. Generally speaking, only taxable investment accounts are considered truly liquid. That’s in contrast to tax-advantaged retirement accounts, which vary in liquidity but generally limit your ability to liquidate your assets.

Illiquid Assets

Financial analysts look at a firm’s ability to use liquid assets to cover its short-term obligations. Generally, when using these formulas, a ratio greater than one is desirable. Suppose a company owns real property and wants to liquidate it because it has to pay off a debt obligation within a month.

How Liquid Assets Work

Without cash, a company can’t pay its bills to vendors or wages to employees. The stock market is an example of a liquid market because of its large number of buyers and sellers which results in easy conversion to cash. Because stocks can be sold using electronic markets for full market prices on demand, publicly listed equity securities are liquid assets. Liquidity can vary by security, however, based on market capitalization and average share volume transactions.

The operating cash flow ratio is a measure of short-term liquidity by calculating the number of times a company can pay down its current debts with cash generated in the same period. The ratio is calculated by dividing the operating cash flow by the current liabilities. A higher number is better since it means a company can cover its current liabilities more what is the meaning of liquid assets times. An increasing operating cash flow ratio is a sign of financial health, while those companies with declining ratios may have liquidity issues in the short-term. Some investments are easily converted to cash like public stocks and bonds. Since stocks and bonds have public exchanges with continual pricing, they’re often referred to as liquid assets.

It must be an item in an established market with a large number of interested buyers. Many mutual funds are also considered to be illiquid because the investors can’t always get to their money instantly. You will be more likely to sell your vehicle for less and may find it difficult to find buyers for your top dollar quote. The importance of Liquid Assets for companies arise from the fact that Liquidity happens to be a key component of financial health, based on which investment decisions are undertaken.

Example of Financial Liquidity

The company receives cash but must pay back the original loan amount plus interest to the bank. A certificate of deposit account, as well as certain types of retirement accounts, can be considered liquid depending on their terms. Cash equivalents refer to any balance sheet item, such as bank accounts, that can be readily used to pay off bills in the short term. The readiness with which they can be used makes cash equivalents liquid.

So, while volume is an important factor to consider when evaluating liquidity, it should not be relied upon exclusively. Selling stocks and other securities can be as easy as clicking your computer mouse. Trying to liquidate a real estate investment can have a high impact on its value.


Tangible assets, such as real estate, fine art, and collectibles, are all relatively illiquid. Other financial assets, ranging from equities to partnership units, fall at various places on the liquidity spectrum. Other current assets, such as prepaid expenses and income tax receivables, cannot be sold for cash, which is why they are not considered liquid assets. Current liabilities mainly encompass accounts payable, accrued liabilities, income tax payable, and a current portion of long-term debt for the average company. Subtracting current liabilities from the above liquid assets shows the financial flexibility of a company to make a quick payment. The operating cash flow ratio measures how well current liabilities are covered by the cash flow generated from a company’s operations.

Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form. Rather, their value reflects factors of supply and demand in the marketplace in which they trade, as well as the degree of risk they carry. For some investors and for some circumstances, illiquid assets actually hold an advantage over liquid assets. If a company or individual can sacrifice liquidity, it may generate higher returns from the asset. Assets like stocks and bonds are very liquid since they can be converted to cash within days. However, large assets such as property, plant, and equipment are not as easily converted to cash.