Liquid assets are the assets already in cash form or that a can quickly be converted to cash. It can indicate to managers and investors what resources a company has to pay off liabilities that might suddenly come due. Liquid assets by definition include cash, cash equivalents, actively traded investments and accounts receivable. Inventory, supplies and other physical assets do not count as liquid assets.
Liquid Assets Formula
Liquid assets are assets that can be quickly converted into cash with no loss of value. As a general rule of thumb, liquid assets must already be in cash form or the business must have the ability to convert the asset to cash in a short period of time (such as less than a month.) If the asset is a security or a bond, the investment must be actively trading on the market to qualify as a liquid asset. Physical assets such as inventory, supplies, buildings and equipment are not considered to be liquid assets.
A useful liquid assets formula is what is known as the "quick ratio" or the "acid test ratio," which measures liquidity by focusing on how well a company can cover its current debts without relying on future sales or other long-term transactions. You can calculate it by taking the cash on hand and adding accounts receivable funds as well as any other assets that can be converted to cash quickly. This total is then divided by current liabilities, giving you a ratio of liquid assets compared to current liabilities. The higher the value, the more liquid the company's assets. Another variation of this is the liquid capital ratio formula, also called the "working capital ratio" or "current ratio"; it simply uses the value of all current liquid assets divided by all current liabilities.
Cash and Cash Equivalents
Cash and cash equivalents are a major part of the liquid assets definition as they are the most liquid assets that a company holds. This includes checking accounts, money market accounts, savings accounts and treasury bills. The liquidity of these assets is why you begin your liquid assets formula by adding the value of all cash and cash equivalents using the current fair market value. If you're making the calculation at the end of the month, the fair market value will be the amount of available funds listed on the monthly bank statement, net of any fees and charges. Cash and cash equivalents are always included in liquid capital ratio formula calculations.
The liquid assets definition of accounts receivable includes only what the business expects to collect within 30 days. Accounts receivable are amounts due to the company from customers. An aging schedule determines which receivables are due within a month. Since liquid assets represent only assets that the business can quickly convert to cash, accounts receivable should not include any doubtful accounts. This allowance is an estimate of how much of the accounts receivable the company believes will not be collected. For example, if you have $50,000 worth of accounts receivables due within 30 days and the allowance for doubtful accounts is 10 percent of receivables, use $45,000 (90 percent of $50,000) in your liquid asset calculation. So long as there is assurance that accounts receivable funds will be collected within 30 days, they can be included in a liquid capital ratio formula as well.
Securities and Bonds
Securities and bonds that are actively traded are also considered liquid assets. You can add the value of all actively traded investments to your liquid assets formula using the current trading price. If you're making the calculation mid-month and you're not sure of the current value of your portfolio, contact your bank or log on to your online account to find the current value. You can also use a financial website to find current values of stocks or other securities. Determine the total of cash, cash equivalents, receivables due within 30 days and actively traded investments to calculate total liquid assets for use in your liquid capital ratio formula.
Personal Liquid Assets
The concept of liquid personal assets is the same as it is for liquid business assets: assets that you can quickly and easily convert into cash without losing value. For individuals, the most common liquid assets are cash, checking accounts, savings accounts, certificates of deposit, cash value of life insurance, stocks, bonds and mutual fund shares. You can also include monies owed to you if it's due within a month or so and you're relatively certain you will receive it. A good example of this is a state or federal tax refund that's currently processing. Use bank statements to determine the current market value of all assets and sum the values to determine total liquid assets.
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- University of Wisconsin-Madison Center for Cooperatives: Balance Sheet Ratios and Analysis for Cooperatives
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.