Complete guide to liquid assets for small business

Liquid assets are assets your business can convert into cash quickly. This type of asset can help you through business emergencies or cash flow problems because they give you quick cash flow you can use to pay business expenses. If you’re wondering what a liquid asset is and how to use it for your business, this article will guide you through what you need to know. 

What Is a Liquid Asset?

A liquid asset is an item of value you can turn into cash quickly and easily. Aside from the obvious option in cold hard cash, marketable securities like common stocks and bonds are also good liquid assets. As a business owner, tracking your liquid assets can help you determine your business’s financial health and your ability to pay debt obligations.

To be considered liquid, an asset must:

• Be in a liquid market (e.g. the stock market)
• Have buyers ready to make a purchase
• Be easy to transfer ownership
• Keep its value when converted into cash

When bookkeeping for your small business, your assets are divided into current and long-term, and these break down further along a scale of liquidity. All liquid assets go under the current assets line on your balance sheet. Businesses can call an asset liquid if it will take less than one year to convert into cash. Your business’s inventory and accounts receivable are current assets that would be considered liquid because they can be transferred into cash in less than one year.

Understanding Liquidity

A business’s liquidity shows that its cash flow is sufficient to pay off all of its short-term commitments. Cash and securities are the most liquid because they’re the most readily usable. Assets that aren’t easily converted into cash are called illiquid or non-liquid assets. Some assets may not be able to be converted into cash at all. 

But don’t swear off illiquid assets altogether. In fact, it’s important for your business to keep a mix of liquid and illiquid assets. One reason: Liquid assets don’t increase in value as steadily as illiquid assets can. The less accessible an asset is, the higher the interest rate and the more it will likely earn. For instance, a real estate investment is an illiquid asset, but it can increase in value a lot more than the same amount of cash held in a savings account. In fact, the value of a liquid asset can even decrease over time due to factors like inflation.

That said, liquid assets can help you when you’re strapped for cash more readily than illiquid assets. Let’s say you need to bump up inventory and have a good amount of cash sitting in your business checking account. You may be able to pull from that account instantly to cover the costs until you can settle some of your invoices.

Liquid Assets vs. Non-Liquid Assets

Assets are not equally liquid. In fact, there are assets that aren’t considered liquid at all (think cash vs. art). These illiquid assets are also called fixed assets. Let’s take a look at the differences between liquid and fixed assets to help you understand why both are important to your small business.

Liquid assets vs. fixed assets

Liquid assets and fixed assets are two categories of assets that a business or individual may own. It’s important for businesses to have a balance of liquid assets and fixed assets. While liquid assets provide immediate access to cash and short-term liquidity, fixed assets contribute to the long-term stability and productivity of the business. The specific mix of liquid and fixed assets will vary depending on the nature of the business, its industry, and its financial goals.

Liquid asset examples

Liquid assets refer to assets that can be easily converted into cash or used to settle liabilities within a short period, typically one year or less. These assets include cash, cash equivalents like money market funds or certificates of deposit, stocks and bonds, and accounts receivable. 

Fixed asset examples

Fixed assets, also known as tangible assets or property, plant, and equipment (PP&E), are long-term assets held by a business that are used to generate income or support operations over an extended period. These assets aren’t easily converted into cash. Examples of fixed assets include:

1. Buildings: Commercial properties or office spaces owned or leased by a business
2. Land: Real estate or property owned by a business
3. Machinery and equipment: Tools, machinery, vehicles, or other equipment used in business operations
4. Furniture and fixtures: Office furniture, display units, shelving, and other fixed furnishings
5. Intangible assets: Non-physical assets that hold value but lack a physical presence, like patents, copyrights, and trademarks

Fixed assets are typically recorded on a business’s balance sheet and are subject to depreciation or amortization over their useful lives. While they aren’t as easily convertible to cash as liquid assets, fixed assets play a vital role in generating revenue and supporting the long-term operations and growth of a business.

Examples of Liquid Assets

Liquid assets are assets that can be easily converted into cash or used to settle liabilities within a short period. Here are some examples of liquid assets:

• Cash: Physical currency, including banknotes and coins, held by individuals or businesses
• Checking account balances: Funds deposited in a bank account that can be accessed through checks, debit cards, or electronic transfers.
• Savings account balances: Money deposited in a savings account that can be readily withdrawn or transferred to a checking account.
• Money market accounts: Money market accounts allow customers to access funds through ATMs, check writing, or electronic transfers.
• Certificates of deposit (CDs): While funds in CDs aren’t immediately accessible without penalties, they can be considered liquid assets if they reach maturity.
• U.S. Treasury bills: Treasury bills have fixed terms of less than one year and are highly liquid as they are actively traded in the secondary market.
• Marketable securities: Stocks, bonds, and other securities that can be easily bought or sold in the financial markets. These include shares of publicly traded companies, government bonds, corporate bonds, and mutual funds.
• Accounts receivable: Outstanding payments owed to a business by its customers or clients for goods or services provided on credit. While accounts receivable are not immediately accessible cash, they represent the amount expected to be received in the near term.

It’s important to note that the liquidity of these assets may vary. Some, like cash and checking accounts, provide immediate access to funds, while others, such as CDs or accounts receivable, may involve certain restrictions or require some time to convert into cash.

Liquidity of Your Financial Accounts

It’s helpful to understand how liquid your business is in case you need to use your liquid assets to help with short-term cash flow issues. 

Financial analysts commonly use two ratios to examine how liquid a business’s accounts are: the current ratio and the quick ratio. The current ratio compares current assets to its current liabilities to decide whether you’re prepared to face hardship. The quick ratio assesses whether the business would be able to manage its current liabilities with only its liquid assets. Consult a financial professional if you have questions about calculating your business’s liquidity. 

Here’s a breakdown of the liquidity levels of each of the bank accounts your business may have:

• Checking accounts: Business checking accounts are the most liquid of all business accounts because they’re the most similar to cash. Checking accounts allow you to pay directly from the account using a debit card or check. Plus, you can use an ATM to withdraw cash instantly without the money losing any value. 
• Savings accounts: Savings accounts for business have more restrictions than checking accounts and limit how many times you can withdraw per month (usually around six times at most). So your savings account is a little less liquid because it’s harder to withdraw cash.
• Money market accounts: Money market accounts are like a cross between a checking and savings account, and they limits how frequently you can withdraw your money. They’re about the same in terms of liquidity as a savings account.
• Cash management accounts: Cash management accounts are like checking or  savings accounts that are offered by a non-bank entity, like a robo-advisor or brokerage firm. These accounts often don’t limit how many withdrawals you can make, so they are quite liquid.
• Investment accounts: These accounts are for your stocks, bonds, mutual funds, and exchange-traded funds (ETFs). They’re fairly liquid, depending on the account. You can sell the assets and receive cash for them quickly, but selling on the stock market also means you risk selling when the value is low, which hurts the liquidity a bit.
• Tax-advantaged accounts: Think of a retirement account like a 401k, an IRA, and an HSA. These are less liquid because you’ll pay taxes to turn them into cash.  
• Trusts: The liquidity of a trust depends on how you set it up. Some trusts are designed to be less readily accessible than others, and therefore less liquid.

Importance of Liquidity in Small Business

Liquidity is vital for the smooth operation and financial health of your small business. Here are several key reasons explaining why business liquidity matters:

1. Meeting short-term obligations: Liquidity helps make sure that a small business can meet its immediate financial obligations, like paying salaries, covering operating expenses, settling bills, and fulfilling contractual agreements. Having readily available cash or liquid assets lets your business maintain its operations without disruptions, build trust with suppliers and vendors, and avoid late payment penalties or damaged relationships.
2. Managing cash flow: Cash flow is the lifeblood of a small business. Maintaining enough liquidity enables effective cash flow management. It helps small business owners bridge any gaps between the timing of cash inflows and outflows, ensuring that there’s enough cash on hand to cover expenses and sustain the business during lean periods.
3. Taking hold of opportunities: Liquidity provides small businesses with the agility to seize opportunities — like purchasing inventory at a discounted price, investing in marketing campaigns, or expanding into new markets — when they come up. Having access to liquid funds allows businesses to act quickly and take advantage of favorable conditions.
4. Handling emergencies and unexpected events: Small businesses often face unforeseen events or emergencies that require immediate financial resources. Say your equipment breaks down, your inventory spoils, or the market suddenly shifts. Maintaining liquidity provides a cushion to handle these unexpected situations.
5. Accessing credit and financing: Liquidity can help secure credit and funding options for small businesses. Lenders and financial institutions consider a business’s liquidity position when assessing its creditworthiness. Strong liquidity helps demonstrate your ability to repay debts.
6. Building trust and credibility: Liquidity contributes to the overall financial health and stability of your small business, which in turn helps to enhance your reputation and credibility. Lenders, suppliers, investors, and customers often view a business with sufficient liquidity as financially responsible and reliable. 
7. Business sustainability: Enough liquidity provides a safety net, ensuring that the business can navigate economic downturns, industry challenges, or unexpected setbacks. It allows the business to weather financial storms and maintain its operations, preventing potential bankruptcy or closure.

Liquidity is essential for the day-to-day operations, financial stability, and growth of a small business. It allows businesses to meet their short-term obligations, manage cash flow effectively, seize opportunities, handle emergencies, access credit, and build trust.

What Liquid Assets Mean for Small Businesses

The more liquid assets you have, the more likely you’ll be able to pay your debts. This is why lenders ask for your bank statements before offering a loan. These assets contribute to your business’s overall net worth, so you’ll appear more low-risk. Lenders want to know that you have emergency funds ready in case your business runs into trouble.

But if you’re not comfortable tapping into your emergency fund, consider small business loans or business credit cards. Small business funding gives you working capital that you can use to pay your business expenses and expand your operations. Nav is the only place you can see the business funding you can qualify for before you apply.

FAQs

• What are examples of liquid assets?
  Liquid assets either are already cash or can be easily converted into cash. Examples of liquid assets include cash, checking and savings account balances, money market account balances, certificates of deposit, treasury bills, and marketable securities. These assets can be used as collateral to secure loans, making them highly liquid and valuable in meeting immediate financial obligations.
• Is a car a liquid asset?
  No, a car is not typically considered a liquid asset. Liquid assets are assets that can be easily converted into cash without significant loss of value or time. While a car has value and can be sold, it’s not as easily convertible to cash as other liquid assets. Selling a car often takes time and effort, and the value of a used car can be subjective and dependent on market conditions. Therefore, a car is generally categorized as a non-liquid, or illiquid, asset.
• Is a 401k considered a liquid asset?
  A 401(k) account is generally not considered a liquid asset in the same way as cash or other readily available funds. A 401(k) is a retirement savings plan offered by employers, where employees contribute a portion of their salary on a pre-tax basis. While the funds in a 401(k) account belong to the individual, there are restrictions and penalties for withdrawing the funds before reaching the age of 59 and a half years of age.
  
  Withdrawing money from a 401(k) account before retirement age may bring early withdrawal penalties and taxes. In most cases, a person can only access the funds in a 401(k) account under specific circumstances, such as financial hardship or separation from the employer. Even in these cases, there may be limitations on the amount that can be withdrawn.
  
  Thus, it’s not typically considered a liquid asset in the same sense as cash or assets that can be easily converted to cash without penalties or restrictions.