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What are liquid assets

Liquid assets play a crucial role in a company's financial health by providing quick access to cash for meeting various expenses.

Liquid assets play a crucial role in a company’s financial health by providing quick access to cash for meeting various expenses.

Definition

Liquid assets encompass resources in a company that can be readily converted into cash. Cash itself is the most liquid asset, as it is already in a form that can be immediately utilized for payments. Additionally, liquid assets include bank deposits, listed stocks, and bonds, which can be easily sold or converted to cash.

Importance of liquid assets

The presence of liquid assets contributes to a company’s liquidity, reflecting its ability to meet financial obligations promptly. Good access to liquid assets indicates strong liquidity, instilling confidence in stakeholders, such as customers, investors, suppliers, and banks.

ALSO READ: The ultimate guide to liquidity and cash flow

Enhancing liquidity

To improve a company’s liquidity, various measures can be implemented:

  1. Liquidity budget: Establishing a liquidity budget assists in monitoring available funds and ensuring efficient cash management.
  2. Distinguishing liquid assets: Not all assets are considered liquid; assets like machinery, despite their substantial value, may not be easily sellable. Recognizing and prioritizing truly liquid assets is vital.
  3. Increasing profitability: Enhance the company’s profitability by exploring opportunities for revenue growth and cost reduction. This can contribute to generating surplus funds for liquid assets.
  4. Invoice selling: If faced with delayed customer payments, consider selling invoices at a slight discount to expedite cash flow and bolster liquid assets.
  5. Cost reduction: Identify and eliminate unnecessary costs within the company to free up resources that can be redirected towards liquid assets.
  6. Negotiating with banks: Engage with financial institutions to secure a larger overdraft facility, providing a safety net for times when additional liquidity is required.