Liquid assets are any assets—including investments and physical property—that can be quickly converted into cash while still holding their market value. For example, if you have money invested in the stock market, those stocks are a liquid asset, because you can exchange them for cash in a short amount of time.
Your business will likely have many different kinds of assets, but liquid assets are a particularly useful type of business capital because they can be used in case of emergencies or to pay off your short-term debt.
If you ever need to assess the cash flow in your budget, it can be helpful to know the full value of your liquid assets and how they contribute to your business’s net worth.
What is liquidity?
Liquidity describes how easily an asset can be converted into cash while still retaining market value. Think of liquid vs. non-liquid assets as two sides of a scale—items are sometimes not 100% one or the other. Cash is the most liquid, land is one of the least liquid, and many other assets can fall somewhere in the middle.
Sometimes an asset can be more or less liquid depending on the current market. A unique item, such as a piece of art, might have a high value, but it also might take months or even years to find a buyer willing to pay a fair price.
Examples of liquid assets
If you want to evaluate how liquid different items in your business are, just think of how quickly and easily they can be converted into cash. Depending on your industry, it’s possible that a great deal of your capital is involved in liquid investments.
Liquid assets include:
- Cash
- Cash equivalents or short-term investments
- Stocks
- Mutual funds
- Treasury bills
- Bonds
- CDs (certificates of deposit)
What are non-liquid assets?
Non-liquid (or illiquid) assets include:
- Real estate
- Vehicles
- Equipment or machinery
These are items that have value in your business, but could take several months (or longer) to sell at market value. However, some of these investments, such as real estate, may offer you long-term gains you might not find in liquid assets.
Understanding cash equivalents
Liquid assets include cash equivalents—these are short-term investments that are low risk and low return. You may choose to keep a portion of your business’s capital in cash equivalents because they often offer more interest than a simple checking account, while still being highly liquid.
Cash equivalents include:
- Treasury bills
- CDs (certificates of deposit)
- Money market funds
- Corporate commercial paper
Determining your business’s liquid net worth
What is a liquid net worth? This is a term that describes the total value of all of a business’s cash and liquid assets. When calculating this amount, it’s important to also consider a business’s liabilities and debt. Knowing your liquid net worth can help you understand how much cash you have on hand for a new investment opportunity or a change in priorities in your business.