Setting things Straight: Liquid vs Non liquid Assets
Liquid assets refer to properties or items that you can quickly turn into cash in a short amount of time. It may include things like marketable securities, cash, or money-market instruments. Both companies and individuals are advised to track their liquid assets as part of their net worth. If you have a business, report these items as current assets.
Non-liquid assets are the opposite of liquid assets. You can’t quickly turn non-liquid or illiquid assets into money. You should often determine the value of non-liquid assets, asking you to transfer ownership. It may take a long time before you can find the proper buyer for non-liquid assets. You may also suffer the negative consequences of selling non-liquid assets recklessly.
Your collectables, paintings, vehicles, real estate, or equipment are a few examples of non-liquid assets. You can learn more about liquid vs non-liquid assets in this article.
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What are Liquid Assets?
Liquid assets refer to properties or items that you can quickly turn into cash in a short amount of time, as mentioned earlier. During conversion, you can still keep its overall market value. Different factors can affect the liquidity of your assets, including:
- How long it took you to sell a property
- How you can quickly transfer ownership
- How established the market is
Your money is the most popular kind of liquid asset, followed by the funds you have in your savings accounts. You don’t have to convert them. If your business needs more liquid assets, you can transfer them immediately.
Non-Cash Liquid Assets
Investments are the best examples of non-liquid assets. Other investment accounts are known as cash equivalents. That’s because you can liquidate them in a short amount of time, ranging from 90 days or less. Long-term holdings have less liquidity, unlike short-term ones.
Your stocks are also another standard example of illiquid assets. Now, the stock market has a steady population of sellers and buyers. The cash conversion process will depend on the security type, but you can usually sell your assets. Then, use the funds within the next few days. Your stocks also have less liquidity than your money. That’s because if the market is down, you’ll have to sell below value forcibly.
Examples of Liquid Assets
Because you’re already familiar with liquid assets and how to track your investments, we’ll dig deeper into the different types of liquid assets in the business world. You must consider adding these to your portfolio, if necessary.
- Cash: The money you currently have on hand.
- Bank accounts: The money in your savings or checking accounts.
- Accounts receivable: The money your business gets from your customers.
- Mutual funds: Funds that accumulate money from different investors into a diverse portfolio.
- Money market accounts: A low-risk, interest-bearing savings account.
- Stocks: The shares under your name.
- Bonds, notes, or treasury bills: A reliable investment option with a wide range of maturity dates. It may also include the date when you’ll get the principal back.
- Certificates of deposit: Your savings account with a fixed withdrawal date.
- Prepaid expenses: Your rent, insurance, or other bills that you’ve settled earlier.
- Retirement investment accounts: IRAs, 401(k)s, or other accounts
Having a diversified portfolio starts with a combination of liquid and illiquid assets.
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What are Non-Liquid Assets?
Non-liquid or illiquid assets are the items you can’t turn into cash. You have to sell most of them to determine their value, leaving you with no choice but to transfer ownership. It can take a long time to find a suitable buyer for your non-liquid assets. You should also remember that selling them can negatively affect their overall value.
Your collectables, paintings, vehicles, real estate, or equipment are examples of illiquid assets. It may also include ownership in non-publicly transacted businesses. You can’t predict the time for cash conversion. Besides, they may need greater effort to liquidate.
Agreeing to the earliest offer on your property can have negative effects, further leading to financial problems. Negotiations can take a long time and require multiple meetings to reach the sum that matches the property’s overall value. But you can’t afford to wait if your bills are increasing and debts are growing.
Examples of Non-Liquid Assets
Non-liquid or illiquid assets are common among consumers and business managers. You’ll have to purchase, lease, or rent non-liquid assets if you want your business to grow and expand without problems. Other examples of illiquid assets include:
- Real estate investments
Inventory is another example of non-liquid assets. If you think you can sell it for a profit after a certain amount of time, then it’s liquid.
Asset Liquidity: Does it Matter?
Asset liquidity is essential in business. It indicates how prepared you are for emergencies or financial changes and whether you’re putting your money to good use. As such, you should familiarize yourself with liquid assets. You’ll also need a clear grasp of which assets can be worthwhile investments.
Liquid assets are helpful, especially during emergencies. Most financial advisors claim that you need emergency funds to cover expenses for a short amount of time. It’ll cover employee turnover, theft, medical insurance costs, repairs, bills, and more. You may also experience problems that can negatively affect the market.
For example, the 2008 financial crisis was the worst economic downturn since the Great Depression. It sent the global stock market spiralling down. Dealing with this crisis isn’t identical to paying an unexpected bill or losing a client, but having hard cash is always a safe option.
You’ll also have higher chances of getting interest rates and loan terms if you own more liquid assets. It’s an essential property for startups. Non-liquid assets offer long-term gains that you shouldn’t use earlier.
Other Types of Liquid Assets
|Exchange-Traded Funds (ETFs)||ETFs refer to investment funds that accumulate like stocks on public exchanges. You can quickly sell these assets. While they’re safer than bonds and individual stocks, you can still end up losing ETFs if you need your money quickly. If you start investing in these, you can see them grow within a few days.|
|Precious Metals||Precious metals can fall under illiquid or liquid assets. You can use silver or gold coins as currency in other states, meaning they can be as liquid as money. You can also trade precious physical metal for cash through dealers. But they can be less accessible depending on where you store your precious metals.|
|Bonds||Other investors purchase bonds and hold on to them until they reach the maturity dates. But the market is vast, meaning that different kinds of bonds are liquid investments. Like other bonds, you can end up selling them for less than you invested in them.|
Tracking Your Assets
You may have questions as to how you or an accountant should be tracking all of your assets. You can track them the old-fashioned way. This is by preparing a balance sheet. Most companies use balance sheets to record shareholders’ equity, liabilities, and assets. It also helps them understand the financial position of a specific time.
You can categorize your assets on this sheet based on how liquid they are. You’ll be able to tell whether you can settle debts on their due dates using a balance sheet. You can also use an expense management tool. It’s a system that companies use to track their expenses. It also helps them settle payments and record employee expenses.
It also features expense reporting, internal policies, and procedures, which determine how the company will pay its employees for the costs incurred. Entertainment and travel expenses are the most common examples of employee-initiated expenses.
On top of the information mentioned above, there is still a lot to learn about liquid vs non-liquid assets. If you wish to know more about the other important aspects related to this different types of assets, you should visit Spenmo today.
Frequently Asked Questions
How do you maintain liquid assets?
You can use liquid management strategies to maintain an asset. Liquidity management refers to practices or systems that ensure your business can access cash if necessary. It may be for investing in new opportunities, making payroll, or paying for products and services. Liquidity management may also mean that your company has a set plan for meeting its immediate and short-term cash obligations.
It means that your company maintains its assets, including cash, to secure financial stability, cover all expenses, and meet all liabilities.
Is high liquidity a good thing?
Your company will have a higher chance of facing financial difficulties if you lower the liquidity ratio. But a high liquidity ratio doesn’t necessarily mean a good thing. Having a high value from the liquidity ratio can tell your company is overly focused on liquidity, affecting business expansion and capital.
Do banks need liquidity?
Banks will also need liquidity because they can’t predict when they’ll need the funds. For example, they may need the money because depositors have decided to withdraw funds from their accounts without informing the institution. Other examples may include:
- Off-balance-sheet operations, including complex derivative transactions and third-party loan guarantees, cause the additional need for liquid funds.
- Line-of-credit gives customers the right to take out loans without any notice.
- Bank creditors may reject renewing short-term wholesale funding as it matures.
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