How Liquid Assets are Vital to the Success of a Business

How Liquid Assets are Vital to the Success of a Business

A company’s liquid assets include anything that can be converted to cash. Although this can describe many things a company owns, the key to real liquidity is the speed in which it can sell the asset. Below are several examples of business asset types.

Common Forms of Liquid Assets

The most typical way that companies pay for debts is with cash. Funds that your business already has in a savings or checking account will be the most apparent form of liquid assets since you can typically access them immediately for any purpose. It’s essential to avoid the habit of borrowing from one account to make a payment on another as this can quickly lead to insurmountable business debt.

Although stocks and bonds are also common business assets, they’re not quite as easy to convert to a cash payment as money from your business checking or savings account. That is because you need to find a buyer for your stocks or bonds and then use those funds to repay your business debt or make an additional purchase. Fortunately, this usually isn’t too difficult to do since an active investment market exists for both buyers and sellers.

Selling Fixed Assets for Cash

A company that needs quick access to cash might sell certain items such as inventory, vehicles, real estate, or business equipment. These are just some examples of fixed assets. Most fixed assets are long-term capital investments that business owners purchase to increase the value of the company. Selling them isn’t usually the first route a business would take, but knowing the option is there if necessary can help companies get through unexpected financial challenges.

An asset is neither liquid nor fixed if the company plans to convert it to cash within the next 12 months, but not immediately. Typical examples include accounts receivable invoices and a company’s current inventory. Anything that cannot be sold for cash in the next year would not fit the definition of a liquid asset.

Why Liquidity is Important in Business

When investors are considering a company to buy stock in, its liquid assets are one of the first things they consider. If a greater percentage of a company’s assets are liquid, it puts the business in a better financial position to deal with circumstances beyond its control, such as a market downturn or recession. Additionally, having more liquid than non-liquid assets means the company does not have a heavy debt burden to pay for fixed assets that will only lose value over time.

Does Your Business Need a Liquid Asset Check-Up?

If your company’s assets aren’t as liquid as you would prefer, consider scheduling a consultation with Aura Wealth Advisors. This is just one of the types of planning we can assist you with as part of our services to business owners.

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