If you’ve ever hunted for a mortgage, you’ll know all about liquid assets. They’re, quite simply, any asset you may have which can be converted into cash. Lenders have asset requirements that potential homeowners must meet so the lenders can feel confident in repayment.
What constitutes a liquid asset?
A liquid asset is an asset held that can be readily converted into cash.
For example, if you have cash in a checking or savings account, that money is considered liquid as it’s easy to withdraw to settle any liabilities. Your assets will be listed on your balance sheet in order of liquidity, while cash ‘equivalents’ might be presented on the top line with your actual cash because they’re so easy to convert.
Physical assets such as inventory, supplies, buildings and equipment are not considered to be liquid assets. This is because you cannot guarantee the sale in a small time frame – a month, for example.
Why must they be convertible?
Because everyone needs to hold cash to operate. Actual cash won’t deviate from its value much and is easy to work with and transfer. You must have liquid assets in case you encounter financial troubles. If you hold a few valuable items, you’re doing quite well ‘on paper’ (which means on your balance sheet).
While getting your head around this concept, it’s handy to have some examples. It’s not as complex as it may seem.
Here are some examples of liquid assets:
- Deposit account funds (checking and savings)
- Certificates of Deposit (CDs)
- Mutual funds
And some examples of non-liquid assets:
- Commodities (like precious metals)
By selling your liquid assets, you’ve got cash ready to go. You can forecast them, so there’s no need to start selling your possessions.
How do you forecast liquid assets?
Imagine you’re producing a monthly magazine with subscribers across the country. With your September edition of the magazine, you’ve seen great sales and have £10,000 coming in to your account. The thing is, you won’t get your hands on this cash until next month – and that’s what makes it a liquid asset. If you were to forecast cost of sales, for example, you could use the advanced options to make it ‘no cash’ so it draws down on stock rather than the bank.
Alternatively, if you imagine your printing bill is paid annually, at the start of the year, but you want to recognise the monthly cost (to be able to see your monthly profit), forecast the cash movement first of all on the current asset account. After that, forecast monthly expenses and use ‘no cash’ to drawdown on the prepayment rather than bank.
The way Futrli is set up means you can alter your cash to include coming cash. It’s a really similar process to ‘normal’ forecasting, but it’s crucial you bear in mind that your liquid assets are not yet cash.