Liquid Assets: What are they and how much should I have?
Having ready access to cash is an important part of doing business, but how much and in what form of assets will be unique to your needs. Therefore, business owners must accurately analyze the liquidity of assets to cover their current–and future–liabilities.
Global events over the past few years upset markets and fueled inflation, which in turn stressed households and businesses, many of which are still struggling. This turbulence exposed weaknesses with business operations, including liquidity. Business liquidity had become increasingly trapped in companies' working capital, causing 71% of small business owners to cite a need to increase liquidity†.
Liquidity applies to assets that are immediately available, such as cash on hand or even funds in a savings account. The term also applies to assets similar to cash that typically don't lose value when sold, such as money market funds. Any money you have set aside for an emergency could also be considered liquid funds.
Not everyone needs access to substantial liquid assets, but business owners periodically require large sums to pay employees, vendors, and other creditors. To tie up those funds in a no- or low-interest bearing account would be a lost opportunity, so make sure you're maximizing your funds to their fullest.
Businesses may regularly need to pay out large sums, such as quarterly property taxes (perhaps on more than one holding),
For business owners to accurately analyze the liquidity of assets, solvency ratios determine a company's ability to cover its current liabilities with all assets (current ratio) or its current liabilities with just its most liquid assets (quick ratio).
Examples of liquid assets held by businesses include:
- Cash and cash equivalents, such as treasury bills, certificates of deposit (CDs), or money market funds
- Marketable securities that include stocks, bonds, preferred shares of stock, index funds, or ETFs
Accounts receivable and inventory can be considered liquid assets but should not be the sole (or large) source of liquid assets because of variables impacting the value and speed with which they could be converted to cash. Also, certain investments must be reported on the balance sheet as a long-term asset and are not technically considered current assets.
A critical part in understanding the liquidity of assets is how quickly they can be converted to cash. How much and what assets are good for you will depend on your unique situation. This is where a Huntington Financial advisor may be able to help.
† ForwardAI. 2021. "Small Business Cash Flow Statistics: The List to End All Lists." ForwardAI. June 5. Accessed May 4, 2022.
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