What is Liquidity? The Importance of Liquidity and Liquid Assets

  • Cold hard cash is the most-liquid asset. Cash does not require any type of conversion and maintains its value. 
  • Securities are assets like stocks, bonds and treasury notes that can easily be converted into cash.
  • Fixed assets are considered less liquid — things like vehicles and real estate.
  • A low liquidity ratio says your company may be suffering financially and that your business is on the road to economic stress.
  • To increase your company’s liquidity, consider what your business has that sells quickly when cash is short. 

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Liquidity means how easily an asset can be converted into cash without affecting the market price. Cash is the most liquid asset you can have. In comparison, an asset with lower liquidity would be something less simple to convert cash. An example would be large assets such as plant, property, and equipment.

Liquidity is the ability to convert an asset into cash easily and without losing money against the market price. The easier it is for an asset to turn into cash, the more liquid it is. Liquidity is important for learning how easily a company can pay off it’s short term liabilities and debts. 

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If you want to borrow money, liquidity is very important for your business. The liquidity ratio of a small business will tell the potential investors and creditors that your company stable and strong and also has enough assets to combat any tough times.

Liquidity and assets

The asset classes below are organized from most liquid to least liquid.

Cash

Cold hard cash is the most-liquid asset. Cash does not require any type of conversion and maintains its value. It’s wise to have cash available as an emergency fund, because you almost always have access to it when you need it, without waiting.

Securities

Securities are assets like stocks, bonds and treasury notes that can easily be converted into cash. But how quickly you can sell the security — and how much you lose in value — can vary based on the security.

Fixed assets

Fixed assets are longer-term or permanent investments — things like vehicles and real estate — that make more sense to use or hold onto for a while before converting them into cash. Fixed assets are considered less liquid.

The very least liquid assets (generally speaking) are businesses that the company owns. These are most difficult to sell because of the high degree of complexity involved in the sale.

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What is liquidity ratio?

It’s a ratio which tells one’s ability to pay off its debt as and when they become due. In other words, we can say this ratio tells how quickly a company can convert its current assets into cash so that it can pay off its liability on a timely basis.

Liquidity ratio for a business is its ability to pay off its debt obligations. A good liquidity ratio is anything greater than 1. It indicates that the company is in good financial health and is less likely to face financial hardships.

The higher ratio, the higher is the safety margin that the business possesses to meet its current liabilities. The liquidity ratio is commonly used creditors and lenders when deciding whether to extend credit to a business.

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Latest News reagarding liquidty :

The country’s largest bank, the State Bank of India (SBI), is sitting on high liquidity ratio of 143 per cent, which implies the bank is either risk averse or there is a lack of lending opportunity. Also, the bank could also be making investments in safe haven low yielding government securities.

The Reserve Bank of India‘s regulatory minimum for liquidity coverage ratio (LCR) is 100 per cent for March 2020. This ratio has been further brought down to 80 per cent post coronavirus outbreak to provide more lendable resources to banks. But the SBI has recently reported 143 per cent LCR for March 2020.

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Cold hard cash is the most-liquid asset. Cash does not require any type of conversion and maintains its value.  Securities are assets like stocks, bonds and treasury notes that can easily be converted into cash. Fixed assets are considered less liquid — things like vehicles and real estate. A low […]