How to Forecast Liquid Assets

Posted on 31st August 2017 in Advisory

Written by Freya Hughes

Forecasting could be one of the most important tools you’re not using. In business and accounting, it’s a crucial insight into the figures you rely on. But if your outgoings start to cascade from your bank account and you’ve got liquid assets as your backup plan, it’s really useful to be able to plug that data into your forecast – just in case. In this blog, we’re looking at what liquid assets are, why they’re important and how to get that data into your forecast.

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. Our Co-Founder Amy Harris makes it easy to understand:

“While property is all about location, business is all about cash flow, and it is the very real difference between making it or breaking it in the business world.”

What constitutes a liquid asset?

A liquid asset is an asset held that can be readily converted into cash. As Investopedia describe them: “An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value.”

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.

Despite making you look like you’re rich, holding such assets as property and vehicles won’t save your business when it’s in crisis

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:

  • Cash
  • Deposit account funds (checking and savings)
  • Certificates of Deposit (CDs)
  • Stocks
  • Mutual funds
  • Bonds

And some examples of non-liquid assets:

  • Property
  • Jewellery
  • Commodities (like precious metals)
  • Artwork
  • Electronics

By selling your liquid assets, you’ve got cash ready to go. But don’t do anything irrational – you can forecast your liquid assets, so there’s no need to flog all your belongings!

Why do we need liquid assets?

Having a handful of liquid assets is good practice in business. They give you the ability to pivot your business from financial demise, as they’ll provide you with some (near) instant cash. Not only this, you’re able to use your assets to reinvest in your business and help it grow sustainably.

You could hire more staff, acquire new stock, and make improvements to premises. It also allows your business to settle debts, return money to shareholders, pay expenses, and most importantly future-proof against any unforeseen financial pitfalls. If your business’ liquid assets are increasing, it often means your business is healthy.

How do you forecast liquid assets?

This is how to use your liquid assets in your forecast. So, 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.

We’ll go with your sales figure for this one, so you’re forecasting with £10,000 outstanding.

Navigate to the Forecasting section of FUTRLI. You will be prompted to map your “default settings” which is where the 3-way magic happens. You will enter your tax settings (if you pay GST/VAT) and map your default bank account, accounts receivable and accounts payable lines. These only have to be entered once, to let the system work out the core automatic 3-way forecasting calculations for you.

You can use your historical data – last year’s actuals in this case – to create a picture of how your business might perform in the future. This method gives you a full forecast in five seconds taking your last year’s operational data as the basis.

This can be a great diagnostic and the best place for you to start if this is new to you. Hit New on the forecast page next to your organisation and you’ll be presented with the varied options.

As you’ll see, the way FUTRLI is set up means you can alter your cash to include coming cash. You’ll notice 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.

Use forecasting to get a real handle on your liquid assets

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