What Are net Liquid Assets ?

net liquid assets are a measuring stick of an contiguous or near-term liquid put of a firm, calculated as liquid assets less current liabilities. Liquid assets are cash, marketable securities, and accounts receivables that can be readily converted to cash at their approximate current value .

Key Takeaways

• Net liquid assets are a measure of the near-term liquidity position of a firm, calculated as liquid assets less current liabilities.
• Liquid assets include cash, marketable securities, and accounts receivables. They are any assets that can be quickly converted into cash.
• Having a net liquid asset position signifies a company is in good health and is able to pay its short-term obligations, such as paying suppliers and paying down short-term debt.
• A net liquid asset position also demonstrates that a company can make new investments without having to take on financing.
• Having too many liquid assets, however, demonstrates an idle use of cash, whereby the money could be put to better use, such as other investments or paying out dividends.

Understanding final Liquid Assets

The measure of net liquid assets is one of a few measures that gives a snapshot of the fiscal circumstance of a firm. Cash and marketable securities are ready to deploy, while accounts receivables could be turned into cash within a short period of clock time, though possibly not wholly as there is typically a little share of bad debt associated with aged receivables. stock does not qualify as a liquid asset because it can not be readily sold without a significant rebate .

current liabilities chiefly encompass accounts collectible, accrue liabilities, income tax account payable, and a stream helping of long-run debt for the average party. Subtracting current liabilities from the above liquid assets shows the fiscal flexibility of a ship’s company to make a immediate payment .

Advantages of Net Liquid Assets

Having a hard net melted asset put is crucial for a fast because it demonstrates that a firm is able to pay off its short-run obligations, such as paying suppliers and paying off short-run debt. It besides signifies that a company is able to make fresh investments, such as the purchase of equipment, without having to take on finance .

Companies that have a firm final liquid asset position are besides good placed in times of economic downturns. They are in a position to weather the storm by relying on its liquid assets to continue paying its short-run obligations even if business is not thunder .

On the early handwriting, a company that does not have a potent internet melted asset position and no significant revenues in an economic downturn will not be able to meet its obligations and may have to declare bankruptcy .

Having net liquid assets besides makes it easier to receive finance from a bank as it demonstrates the ability of a ship’s company to pay off its loans, even in times of distress. This besides results in normally receiving a better concern rate on a loanword.

Though having net income liquid assets is a positive position to be in, having besides many fluid assets is not the most beneficial function of cash, as it could be invested and earning a return key elsewhere, rather than sitting idly in a deposit history. conversely, it can besides be used to pay dividends to shareholders .

There is a all right balance that a company must strike between enough liquid assets and besides many liquid assets. The general rule of thumb is that if a commercial enterprise has six months of liquid assets to meet short-run obligations and cover operate expenses, it is in a good position financially .

real World model

The Container Store Group, Inc. as of Dec. 30, 2017, had the follow components on its balance sail for stream assets and current liabilities :

current Assets

• Cash: $22.7 million
• Accounts Receivables: $29.5 million
• Inventory: $110.5 million
• Prepaid Expenses: $11.7 million
• Income Tax Receivable: $1.5 million
• Other Current Assets: $10.3 million

current Liabilities

• Accounts Payable: $53.8 million
• Accrued Liabilities: $73.5 million
• Current Portion of Long-Term Debt: $9.5 million
• Income Tax Payable: $1.7 million

net liquid assets as of this date would be Cash + Accounts Receivables – current Liabilities = $ 22.7 million + $ 29.5 million – $ 138.5 million = – $ 86.3 million. The negative net liquid situation of the company may be a concern, but this situation is typical for a retailer. still, it indicates that the company is not in the best fiscal position, particularly if the economy takes a change by reversal for the worse .