What are liquid assets? Definition, examples, and differences from non-liquid assets

Liquid assets are important for every business. When you can convert an asset to cash quickly, you can be more agile when faced with unexpected expenses or growth opportunities.

Asset liquidity is an essential part of your business’s financial profile. This article defines the meaning of liquid assets and the most common examples, explores how to measure liquidity, and demonstrates why they matter for your business.

What are liquid assets?

Liquid assets are any type of asset you can quickly convert to cash without incurring a significant loss, such as cash accounts, stocks, short-term bonds, and money market instruments. You record them on your company’s balance sheet and consider them a cash equivalent on a financial statement.

For an asset to be considered liquid, it must be:

• Easily converted to cash: You can convert liquid assets to cash quickly and easily without waiting for a buyer
• Stable in value: Liquid assets retain their value upon conversion, so there’s minimal risk of losing money
• Immediately available: You’re able to convert liquid assets to cash immediately for emergencies or business opportunities

Cash itself is the most liquid asset, while assets like real estate or inventory are generally harder to move, making them less liquid.

Why are liquid assets important?

Financial liquidity matters because it helps cover ongoing or emergency costs while reducing the need for increased debt. It gives you flexibility when you need to make a quick decision about an opportunity or a large expense. This is true both for businesses and individuals.

Liquid assets help your bottom line by:

• Meeting short-term obligations: When you have liquid assets, you always know you can quickly convert them for any day-to-day expenses that arise
• Managing risk: There are many market disruptions, such as economic downturns or unforeseen expenses, that are out of your hands; liquid assets give you an insurance policy against high-interest loans or selling assets
• Providing flexibility during emergencies: When emergencies strike, you need to be ready, and liquid assets offer the flexibility you need to avoid running up debt when your life or business is unpredictable

Liquidity helps balance risk and growth in financial planning. When building your budget, you can seize on opportunities if you know you have access to quick cash. Faced with a crisis, you can act quickly without worrying about the strain it might put on your business or bank account.

Examples of liquid assets

Here’s a guide to understanding the most common liquid assets. Each example is broken down for clarity so you can better understand what it is and how it functions in the real world.

Cash and cash equivalents

These are physical cash, checking accounts, savings accounts, and certificates of deposit. You can access funds transferred to one of these cash accounts almost anywhere and anytime; there’s no need to sell or convert them to use them. They’re your most liquid assets and your most flexible form of payment. You may also hear these assets referred to as liquid cash.

Marketable securities

Stocks, bonds, and Treasury bills are known as marketable securities. These are almost as liquid as cash but generally take 1–3 business days to convert.

Selling publicly traded shares on the stock market is a typical example of converting marketable securities. Selling your shares is usually quick, giving you the cash you need to meet your obligation.

Accounts receivable

Accounts receivable (AR), the money owed to your business for services or goods you already provided, is considered a liquid asset because it represents cash flow you can expect in the short term.

However, the liquidity of your AR depends on factors such as customer reliability, payment speed, and payment terms. For those reasons, some financial professionals consider accounts receivable to be a semi-liquid asset.

Money market funds

Given the number of eager buyers, money market funds are considered liquid because you can sell them on short notice without losing substantial cash value. Money market funds, like mutual funds, usually convert within a day. Because you have to sell them, they’re less accessible than physical cash or a checking account, but they’re more liquid than long-term investments like real estate.

Liquid vs. non-liquid assets

A non-liquid asset is the opposite of a liquid asset. Sometimes called illiquid assets, these won’t readily convert to cash without a potential loss of value or delays. Common examples of non-liquid assets include:

• Real estate holdings
• Vehicles
• Collectibles
• Retirement accounts like a 401(k)
• Private business equity

The primary differences between liquid and non-liquid assets are the conversion speed and the funds’ ease of access.

Examples of liquid vs. non-liquid assets

Let’s say you have a sudden and unforeseen repair bill. You have two options: You can withdraw the money from your checking account, or you can sell your car to pay the bill.

Withdrawing the funds from your checking account is an example of utilizing a liquid asset. You can withdraw the money directly from the account without incurring any loss, and you have access to the funds immediately or within a few days.

On the other hand, selling your car requires time to find a buyer, and there’s a chance you’ll sell for less than it's worth—and almost certainly less than what you paid. This would be an example of utilizing a non-liquid asset.

Non-liquid assets can potentially grow over time, but are harder to access quickly. Liquid assets are flexible and readily available when needed.

How to measure liquidity

Measuring your liquid net worth provides insight into your financial stability, your ability to meet short-term obligations, and how well you can navigate risk without relying on debt or new income. To measure your liquidity, you'd use a liquidity ratio like the current ratio or quick ratio.

Liquidity ratios help you measure your ability to pay off current debt obligations without outside financial assistance. They assess your current liabilities compared to your liquid assets, enabling you to determine how much short-term debt you can manage if you face unexpected financial challenges.

You use these liquidity ratios in financial statements and balance sheets to provide insight into how well you manage working capital and can pay off bills as they arise. They help present a comprehensive view of where your business stands with and without semi-liquid assets.

Current ratio

The current ratio measures your ability to pay off current liabilities within a year using current business assets, such as cash, and semi-liquid assets, such as inventory or accounts receivable.

This is the formula:

Current ratio = Current assets / Current liabilities

The higher the ratio, the better your liquidity. If it’s greater than 1, you can pay off your current obligations using current assets. Your current liquid assets can’t cover your liabilities if the ratio is lower than that. That’s when you might need to consider alternative funding options.

Suppose your company currently has $100,000 in assets and $75,000 in liabilities. Using the formula, your current ratio is 1.33, meaning your company has healthy liquidity.

Quick ratio

The quick ratio, also known as the acid-test ratio, measures your business's ability to meet short-term obligations using only your most liquid assets. Quick ratios are similar to current ratios, but they exclude inventory and prepaid expenses.

This is the formula:

Quick ratio = (Current assets – Inventory – Prepaid expenses) / Current liabilities

The current ratio can include semi-liquid assets, such as inventory and prepaid expenses, while the quick ratio doesn’t. A quick ratio lower than 1 could indicate insufficient liquid assets. You can’t easily convert those to cover current liabilities.

Let’s say the same company, with $100,000 in assets and $75,000 in liabilities, also has $20,000 in inventory and $5,000 in prepaid expenses. The quick ratio is 1. It’s slightly lower than the current ratio, but still indicates the company’s ability to meet its obligations.

Cash ratio

The cash ratio is a more conservative liquidity measure. It only includes cash and cash equivalents and calculates how well your business can meet obligations immediately.

Why liquid assets matter for business

Liquidity is crucial when you need funds on short notice. Liquid assets ensure your business has the resources necessary to meet its liabilities or obligations. The more liquid assets your company holds, the more flexible and agile it is:

• Business operations: Liquid assets ensure you always have funds for your business's operating expenses. This includes rent, salaries, equipment, and office supplies. You can always pay on time without incurring additional debt.
• Creditworthiness: Lenders and investors use your liquidity ratio to assess your creditworthiness. Higher liquidity means less risk and easier access to credit, often with better terms.
• Risk management: Managing a business means managing risk. Emergencies or unforeseen disruptions can happen. Liquidity ensures you have the cash you need to mitigate these risks and stay afloat in times of uncertainty.

Insufficient liquidity, on the other hand, can have negative consequences:

• Inability to pay debts
• Missed business opportunities
• Cash flow problems
• Reputation damage

Strategies for improving liquidity

If you’re looking to improve your liquidity, consider these strategies;

• Better cash flow management: Keep an eye on your cash flow so you can accelerate income, extend payments, reduce nonessential spending, and build cash reserves
• Reduced receivables: Tighten your payment terms with clients or give discounts for early payment to encourage faster payments
• Maintain an emergency buffer: According to PYMNTS, 70% of small businesses have less than 4 months of cash reserves. Build an emergency fund into your budget so you always have cash ready if you need it.
• Convert assets you don’t need: Look closely at your equipment, excess inventory, or nonessential assets and sell what you can to raise funds

How Ramp helps improve liquidity

If you calculate your liquidity ratios and find that your business isn’t as liquid as you’d like, don’t panic. This is where Ramp can help.

We designed our corporate card to strengthen your finances. Ramp offers credit limits up to 30x higher than traditional business credit cards, and our 30-day payback period can help increase your liquidity by granting you more purchasing power and flexibility.

On top of that, Ramp's AI analyzes all your business transactions to identify savings opportunities. Our software gives you increased visibility into your finances, allowing you to track and measure your company's spend in real time, giving you more control over your liquidity.

Try an interactive demo to learn more about how Ramp helps customers save an average of 5% a year across all spending.