What are liquid assets?

A company can own many types of assets, and it’s essential to understand the difference between different categories. Asset management is important for the financial health of your business, so keep reading to learn about liquid assets and the other types you may come across in your business operations.

We’ll cover:

• What are assets?
• What are liquid assets?
• When will liquid assets be used in business?

An asset is an item of value that you own or use to help you run your business. Assets can be anything worth a cash amount, including cash itself, or something you can sell to convert into cash. 

So what are liquid assets? Assets fall into different categories, depending on what they are and how quickly you can turn them into money. 

A liquid asset is a business term for cash or an asset quickly converted into cash. The ‘liquidity of an asset is the ease with which you can turn that item into money. Just as a liquid can freely flow, the term describes assets that can freely flow from one form into cash or from one account to another as a concrete sum of money (unlike investments that may change in market value).

For an asset to be considered liquid, it must meet a few criteria:

• It must be in an established market (i.e., a market that is not unstable and doesn’t alter items value very much, unlike stocks or shares that can be unpredictable).
• It must have a large number of interested buyers (for example, it cannot be a niche product that will take a long time to sell, there must be demand for it.)
• The ownership of the asset must be transferred easily (unlike a house, for example, this process takes much longer for the asset to change hands).

Liquid assets are the most common asset that every business will hold because it includes the money they hold in the bank.

Some examples of liquid assets are:

• Cash in the bank or physical money such as petty cash.
• Cash equivalents, like short-term bonds or savings accounts.
• Inventory (goods or raw materials that you could sell quickly for a cash value).
• Accounts receivable (the money customers owe you).
• Short-term investments that you can withdraw for cash at any time.

Current assets are similar to liquid assets in that they are assets you can convert into cold, hard cash within a short period of time. Cash in the bank is often counted as a current asset in financial documents, as there is not always a need to have a separate liquid asset total in your accounting.

A good rule of thumb to tell if the item of value is a current asset is you can convert it into cash within a matter of weeks. 

Fixed assets are not liquid items and will take months, if not longer, to sell and turn into their cash value. They are usually items you may use in your day-to-day operations and will be useful to your business for more than a year.

Examples of fixed assets include: 

• Vehicles (such as company cars)
• Office furniture and equipment such as laptops 
• Machinery or specialist tools
• Property
• Land
• Long-term investments

What makes an asset fixed is that it can’t be converted readily to cash if you ever had to pay a debt or expense quickly.

Another way of categorising assets is to look at tangible and intangible assets. Tangible assets are physical items that you can touch and are usually used as operational resources. Examples of tangible assets include stock/inventory, property, and equipment, some can be considered liquid, and some may not.

Intangible assets, however, are nonphysical items that are still valuable to your business, such as your brand name, patents, and copyrights. It’s very unlikely that you would have an intangible asset considered a current or liquid asset as these things have no set market value.

Keeping track of your assets is a legal requirement for limited company owners (find out more here) because they must submit financial documents annually to HMRC and Companies House. If you are a sole trader, it’s still important to know your assets and total value to better understand your business’s financial health.

You’ll need to know the value of your assets (both current, liquid and fixed) so you can calculate your company’s net worth. Your net worth is what your business would have leftover in cash if you sold all your assets and paid all your debts. Your liquid asset total should be a part of this calculation so you know how much money you could have quick access to if you were in a tough spot.

You should also know how much your assets are worth regularly so that you can get the proper insurance for them. Being underinsured can be a big issue if you ever did have to make a claim, so understanding the total value of what you own is essential.

If you are ever looking for investment or a loan, lenders may also need proof of your business assets. Investors or lenders will want to know what items of value you have currently, and in some cases, you may be able to use assets as collateral to help you secure a loan.

Now you know what your liquid assets are, you should look into software that can help you keep track of your cash easily. Countingup is a business current account and accounting software in one app that can save business owners hours of accounting and bookkeeping admin. 

The app automates a lot of the time consuming manual tasks associated with running a business. For example, it can help you create invoices in seconds, reconcile invoices once paid, automatically categorise your expenses and total up a tax estimate, so you’ll always know how much you owe HMRC.

Countingup is saving business owners hours of time-consuming bookkeeping admin and helping thousands keep on top of their finances. Find out more here to save yourself hours of accounting and financial admin, and get back to what you do best – running your business.