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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 accountancy, 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. “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,” says our Co-Founder Amy Harris.

What constitutes a liquid asset?

A liquid asset is an asset held that can be readily converted into cash. As Investopedia put it: “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

So you have items which hold cash value, so it’s simple to plug this data into a forecast. By simply selling your assets, you’ve got cash ready to go, but let’s not do anything irrational – you can forecast your liquid assets, so there’s no need to flog all your belongings!

A sign for a Yard Sale

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 ‘Scenarios’ section of FUTRLI. This is where you build everything from budgets, to scenarios to effortless cash flow forecasts. Before you’re allowed to create your projection, you first need to enter your tax settings and map your default bank account, accounts receivable and accounts payable lines. These only have to be entered once, so let the system work out the core automatic calculations for you.

Use your past data to instantly create a picture of how you expect the business to perform in the future. Adjacent to your organisation, click ‘New’, which will give you four main options, one of which being ‘Create from Last Year’s Actuals’. This is the best way to create a base forecast, to which you can alter and edit how you see fit.

Once you press ‘Quick Create’, FUTRLI will look at your profits, costs and overheads month-by-month for the 12 months prior to your scenario’s chosen start date. These will then be applied going forward, thus ensuring that any seasonal variety is taken into account. For example, if you sell more in November and less in December, you’ll see that factored into your projection. As you can 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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