Definition
 

A liquid asset refers to an asset that can be quickly and easily converted into cash without significantly affecting its market value.

Description
 

Liquid assets, sometimes known as "liquid funds," are financial products that can be easily turned into cash while maintaining their worth. These assets primarily consist of short-term investments such as money market instruments, Treasury bills, commercial paper, and bank deposits. Liquid funds, often known as cash equivalents, have a high liquidity, allowing investors to access their funds quickly and efficiently when necessary. They offer a safe and steady investment with low risk, making them ideal for short-term cash management and emergency fund reserves.

Importance of liquid assets for small businesses.
 

Small firms rely on liquid assets for a variety of reasons.

1. Emergency Fund: Liquid assets are a financial buffer against unexpected spending or emergencies. Having readily available cash enables small businesses to deal with unforeseen obstacles, such as equipment breakdowns, supply chain delays, or unexpected declines in income, without resorting to costly borrowing or risking bankruptcy.
2. Operating Expenses: Small businesses require cash flow to fund operating costs such as rent, utilities, payroll, and inventory replenishment. Liquid assets give sufficient liquidity to meet these obligations on time, ensuring smooth corporate operations and preventing service disruptions.
3. Opportunity Seizing: Having liquid funds allows small firms to capitalise on possibilities for development or investment when they emerge. Whether taking advantage of cheap inventory purchases, engaging in marketing initiatives, or leveraging strategic relationships, having cash on hand enables firms to respond quickly and capitalise on favourable market conditions.
4. Debt Servicing: Small businesses may be required to repay loans, pay interest, or meet other debt obligations regularly. Maintaining sufficient liquid assets ensures companies can satisfy their financial obligations on time, avoid loan defaults, and protect their creditworthiness for future financing needs.

How to calculate liquid funds?

Here are five steps to calculate liquid funds:

1. Identify Liquid Assets: List all liquid assets the business holds, including cash in bank accounts, marketable securities, short-term investments, and any other financial instruments that can be easily converted into cash within a short period.
2. Determine Current Values: Determine the current market value of each liquid asset. Cash held in bank accounts is the balance available for immediate withdrawal. For marketable securities or investments, use the current market price or fair value to estimate their worth.
3. Total Liquid Assets: Sum up the values of all identified liquid assets to calculate the total liquid assets available to the business.
4. Identify Short-Term Liabilities: Identify any short-term liabilities or financial obligations the business needs to fulfill within a specified period, typically within the following year. This may include accounts payable, short-term loans, upcoming expenses, or other liabilities due shortly.
5. Calculate Net Liquid Funds: Subtract the total short-term liabilities from the total liquid assets to determine the net liquid funds available to the business. This figure represents the surplus cash or liquidity the company can use for various purposes, such as covering operating expenses, investing in growth opportunities, or building reserves.

Trends that can affect liquid assets

Two trends may impact small enterprises' liquid assets:

1. Economic Uncertainty: Recessions, market downturns, and geopolitical instability can all impact the availability and stability of liquid assets. Cash flow variations, limited access to credit, and changes in market circumstances can all impact the value of businesses' liquid investments.
2. Technological innovations, such as digital payment systems, fintech solutions, and online banking platforms, influence how organisations manage cash and liquid assets. These advances provide prospects for speedier, more efficient cash management, but they also introduce concerns such as cybersecurity and the need to adapt to new technologies.

Example

Reliance Industries Limited is an example of an Indian brand with liquid assets. Reliance Industries, one of India's major conglomerates, has significant liquid assets such as cash reserves, marketable securities, and short-term investments. These liquid assets give financial flexibility and stability, allowing Reliance Industries to make strategic investments, effectively manage working capital, and confidently navigate market changes.

FAQ
 

What are liquid funds?

Liquid funds are mutual funds that focus on short-term, low-risk money market securities like Treasury bills, commercial paper, and bank certificates of deposit. These funds have high liquidity, allowing investors to readily access their assets while minimising the impact on their value, making them ideal for short-term cash management and emergency funds.

For how long can you keep money in liquid funds?

Liquid funds provide high liquidity, allowing investors to withdraw cash as needed, typically within one to three business days. Depending on your financial objectives and liquidity requirements, you can use liquid funds as a short-term cash management solution or keep them for extended periods of time.