Liquid assets are one factor considered in a calculation of a company's net worth. However, while liquid assets refer to assets a company could quickly sell for cash, net worth factors in all assets along with all liabilities.
Liquid Asset Basics
Liquidity is the ability to quickly convert assets into cash. Therefore, liquid assets represent the items your company easily can sell for cash when necessary. Cash and marketable securities are the most liquid assets of a business, as these assets already are in cash form. Accounts receivable is another common liquid asset for a business. These are amounts owed by customers that you expect to receive within a short period of time. Inventory is another liquid asset, though selling inventory for cash negates optimum profit opportunities.
Liquid Asset Applications
The primary benefit of a high amount of liquid assets is financial safety. If you get hit with high debt and expense obligations in the short run, you can use liquid assets to cover these costs without having to acquire more debt. Companies often calculate liquidity rates, which measure the relationship between liquid assets and short-term debt. The current ratio, quick ratio and cash ratio all are liquidity ratios. While favorable liquidity ratios reflect a nice safety net for a business, it generally is best not to have to convert liquid assets to cash for emergency purposes.
Net Worth Basics
Net worth, also known as owners' or shareholders' equity, is an assessment of the accounting value of a business. The simple formula for calculating net worth is total assets minus total liabilities. While liquid assets are included in the formula, net worth also factors in less liquid or long-term assets. The purpose of calculating net worth is to determine the company's book value. Rather than generating quick cash, net worth depicts what the company would have left if it sold all assets and paid all debt.
Different Types of Value
Net worth is illustrated on two common company financial statements -- the statement of owners' equity and the balance sheet. The balance sheet reveals current total assets, total liabilities and owners' equity. The statement of owners' equity breaks net worth down by types of ownership and factors that affect book value. Whereas net worth shows an asset perspective of business value, market value reflects what a potential buyer is willing to pay for the company. Intangible or future earning potential of a business often leads buyers to pay more than what net worth calculations suggest a company is worth.
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