What are Liquid Assets?
A business also takes into account current market conditions when considering its own liquidity. Gentry, F. Bruce, et al. If the difference is slight, it makes for a reliable, liquid market. For more on investing and finances, take a look at the next page. In a liquid market, assets can consistently sell quickly and without a loss of value. Conversely, if there’s a big discrepancy, the market is thin. Many factors influence how easy it will be — such as inflation and interest rates. This can be understood in terms of the bid-offer spread, which is a comparison between the prices at which things are sold and later bought in a market. On the other hand, during a thin market, the values of assets change rapidly, and selling assets at a profitable price becomes harder.
You’re not the only one concerned about a low level of liquid assets. People will be more likely to invest in, or lend to, a company that has enough liquidity to keep up its payments. On the next page, we’ll learn how corporations must keep an eye on liquidity to live up to their obligations. However, a company can have too much liquidity, which may be a sign that it’s holding onto cash that could be invested. To keep a business running, it usually takes on a lot of financial obligations, including paying employees salaries and paying off loans and debts. To appease the various stakeholders, an organization must keep a healthy balance of liquid assets.
It turns out that, depending on how and when you invest, spend or save your money, your worth varies. Liquid assets make up just one special category of your worth. Each of our bodies is 60 percent water; we all know we need to drink it to live. Understanding it will help you get a better idea of your own financial situation. But how much of your finances should be liquid?
This is where the idea of liquidity differs between personal finance and corporate finance — a year’s time is relatively long-term for an individual’s financial obligations, but not for a company’s. However, the idea of liquidity gets even more muddled in the corporate world. On the other hand, the company’s willingness to sell off assets early (forcing itself to accept a discounted price) also plays into whether it can be counted as liquid. The time period for what makes a current asset, for instance, could be a year or the duration of the company’s operating cycle. Whether an asset is liquid depends when the business’s obligations are due.
