Liquid Assets for Better Flexibility and Improved Cash Flows
A liquid asset is an item of value that can be sold and converted into cash quickly. Cash is the most straightforward example that can be used immediately for loan repayment or the purchase of goods and services.
Examples of Liquid Assets
Besides cash, there are other examples such as life insurance policies and investment instruments such as mutual funds, bonds, and money market shares. Money deposited in a current account is considered liquid because the holder can make an unlimited number of deposits and withdrawals. In contrast, savings accounts come with limitations on the number of withdrawals. Then, there are jointly-owned items whereby a certain percentage or portion of the asset is liquid. Thus the ability to quickly sell a possession depends on different factors, including joint ownership, the current state of the economy, demand, market forces, and others. There are straightforward examples and others that are not as clear cut. Balance of trust funds and tax refunds are easy to understand. A final settlement is an example of a liquid asset based on the payment term specified.
When it comes to personal finance, mutual funds, certificates of deposit, and money market and checking accounts are considered liquid. Stocks and bonds are also examples, but the holder may sell them at a loss. While they can be converted into cash, stocks are not as liquid as other investment instruments, deposits, and cash. Land is on the other end of the spectrum because it is more difficult to convert into cash. This depends on factors such as price, location, the economic situation, supply and demand, and others. Collectibles and antiques can be regarded as liquid, depending on the market and the number of potential buyers. Collectibles are items such as CDs, jewelry, stamps, baseball cards, TV show and movie DVDs, and others.
Illiquid Assets
These are items of value and property that cannot be sold quickly because there are no speculators or investors who are willing to buy them within a short period. This is the case with real estate during recession and when the market is unstable. The problem is that it is more difficult for investors to determine the market value of the property.
Business Assets
Businesses purchase or lease such as machinery and equipment, plants, buildings, land, and others. Examples of assets that are quickly converted into cash include accounts receivable and securities. It is important for businesses to be liquid in order to meet their loan payments and expenses. When it comes to business finances, possessions are divided into three categories – current, quick, and liquid. The latter refer to land, machinery, and equipment that will be left if a company has to repay its outstanding obligations. Current assets can be sold within a short period (1 year) while quick ones are fairly liquid. The liquidity gap shows the difference between the company’s liabilities (loans and money owed to suppliers) and assets owned. Companies with a negative gap are considered high risk by investors, suppliers, and financial institutions. Of course, other factors play a role such as demand, creditworthiness, whether the company is established, the particular sector, and others.
Benefits
The main benefits for businesses and individuals are accessibility and flexibility. They have access to funds in case of emergency. Imagine having $30,000 in your money market or savings account. If you lose your job or are admitted to a hospital, these funds are immediately available. Businesses also use liquid assets to diversify their investment portfolios. This is a good choice for investors with a low-risk profile. Risky investors also look for ways to diversify their portfolios. For example, if they find hot stock they want to buy immediately, they can use the money in their savings account. The risk is lower because liquid investments can be sold at full value. Moreover, they help build trust and strong financial profile. Banks and other establishments favor applicants who have funds in their savings or money market account. This increases their chances of getting approved for a mortgage or business loan. The reason is that such applicants have additional sources to make monthly payments.
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