Liquidity vs. Liquid Assets: An Overview

The term liquidity indicates that an individual or company has sufficient liquid assets to pay bills on time. Liquid ass꧋ets can be cash or possessions that can be converted into cash quickly without losing a substantial amount of their value.

Understanding Liquidity and Liquid Assets

An individual has achieved 澳洲幸运5官方开奖结果体彩网:liquidity if they earn enough income in a month to pay all their🅘 bills without sacrificing any other immediate necessity.

Liquid assets consist primarily of cash in a checking or savings account. The checking account balance may fall short if an unexpected expense comes up. The individual may have to dip into a savings account, pawn a gold watch, or cash in a few bond shares but liquidity has been maintained. They have sufficient liquid assets to pay the bills on time. No great harm has been done if the same problem doesn't arise month after month.

Liquidity has not been maintained, however, if this individual has no other li💛quid assets to tap. The only options are borrowing at a high rate of interest to meet the bills, selling a possession at a probable loss, o💎r failing to pay bills on time.

Example of Liquidity

An individual or a business ideally has sufficient liquidity to meet all regular expenses plus a bit extra f🦄or unusual demands.

A bank's liquidity is determined by its ability to meet all its anticipated expenses using only liquid assets. Expenses probably include such as funding new loans or fulfilling customer account withdrawals. The anticipated expenses are only an estimate of how much customers may withdraw from savings or how many new 澳洲幸运5官方开奖结果体彩网:mortgages may be issued advantageously.

Banks in particular have to err on the safe side, maintaining liquidity at all times without fail. The bigger the cushion of liquid assets relative to anticipated liabilities, the greater the bank's liquidity.

Liquid vs. Illiquid Assets

The most common types of liquid assets for businesses are cash deposits in checking and savings accounts and 澳洲幸运5官方开奖结果体彩网:marketable securities. The 澳洲幸运5官方开奖结果体彩网:accounts receivable or payments owed to the com𓂃pany are part of the company's liquid assets for that period as well.

No company wants to keep a lot of cash sitting in a checking account so some of its liquid assets may be in marketable securities. 澳洲幸运5官方开奖结果体彩网:Treasury bills or bonds can be𝓀 turned into cash on short notice wiඣth little or no financial loss involved.

Businesses also have illiquid or "fixed" assets just as individuals do. Property, buildings, equipment, and supplies all are fixed assets.

Should stocks be considered liquid assets? Not necessarily. They can be bought and sold instantly but they'll be converted into cash at a high cost to their owner if they're bought at a high price and a need for cash arises when they've sunk to a low price. That fails to meet the standard of liquidity. The assets must be either cash or property that can be turned into cash without a substantial loss in value.

A company or an investor with a highly 澳洲幸运5官方开奖结果体彩网:diversified investment portfolio can count some or all of its holdings as liquid assets. All or parts of the portfolio can be sold at any time without a substantial𝄹 loss in value overall🌄. A person with a modest number of stocks is wiser to hold onto them until it's the right time to sell.

Liquidity Plus

Well-run companies keep a little more liquid assets than the bare minimum necessary to maintain liquidity. This is particularly true in the banking industry. It became clear during the 澳洲幸运5官方开奖结果体彩网:financial crisis of 2008 that U.S. banks weren't mainꦉtaining th🥀e liquid assets necessary to meet their obligations in all cases.

Many of the banks suffered a sudden and unexpected withdrawal of depositor funds or were left holding billions of dollars in unpaid loans due to the 澳洲幸运5官方开奖结果体彩网:subprime mortgage crisis. They rapidly became insolvent without a sufficient cushion of liquid assets to carry them through troubled times. The U.S. government had to step in to prevent a total 澳洲幸运5官方开奖结果体彩网:economic collapse.

A 澳洲幸运5官方开奖结果体彩网:liquidity coverage ratio rule w♏as developed as a result. The rule ensures that banks keep enough cash on hand to avoid a repeat performance of what happened in 2008. All banks must maintain liquid asset stores that equal or exceed 100% of their total anticipated expenses for 30 days. The bank can meet all of its financial oꦿbligations without having to take on new debt or liquidate fixed assets in the event of a sudden dip in income or an unexpected liability.

It's designed to give them time to resolve the issue before it turns into another financial disaster.

The Bottom Line

Liquidity brings a certain amount of stability to individuꦆals and companies. Using illi🅺quid assets to meet routine financial obligations is problematic.

A company that sells off 澳洲幸运5官方开奖结果体彩网:real estate to meet a financial obligation could be in trouble. It might even have to sell the property at a discount if th𒀰e money is needed in a hurry. The company has permanently lost a valuable asset in any case.

Liquidating 澳洲幸运5官方开奖结果体彩网:fixed assets to pay debts can have a detrimental impact on the ability to function profitably down the road. A clothing manufacturer that has to sell some of its equipment to pay off loans will have difficulty ma♛intaining consistent production levels.

Liquidating fixed assets is usually a last-resort solution to a short-term problem.