Liquid assets refer to assets that can be used by an individual or a company in the form of hard cash. The higher the liquidity of an individual or a company, the more powerful their credentials are. So, liquid assets are a vital part of a financial profile. For a better understanding, take a look at the answers to some commonly asked questions on liquid assets.

Which investments are considered to be liquid?
Any investment that can be turned into cash immediately without losing value is considered a liquid asset. Some examples of liquid assets are stocks, mutual funds, bonds, and money market funds. These can be easily changed to their cash value to help the owner with funds. It is important that there should be no penalties in withdrawing money. A certificate of deposit (CD) can also be considered a liquid asset if there are no penalties in withdrawal.

On the other hand, a car, expensive artwork, and real estate are not liquid assets two main reasons:

• They may depreciate in value over time
• They take time to be sold for their right value, and so, do not provide immediate liquidity

Why is the liquidity of assets important?
Consider liquid assets to be your emergency fund. You can tap into them whenever you need. Liquid assets help with funds when you need it the most as they are available without wasting any time. For instance, if you need cash for a medical emergency, you would look to sell your mutual fund investments rather than your car.

Liquid assets also help while applying for loans and mortgages. Your lender will evaluate your liquidity and then ascertain the amount they can approve.

What level of liquidity should be maintained?
There are calculations for businesses to determine their ideal liquidity ratios. On an elementary level, it can be explained in this way: you can determine the liquidity to be maintained by dividing the current assets by on-going liabilities. These liabilities include overhead charges, salaries, and business loans, among other expenses.

Remember that a high liquidity ratio is always favorable. A business is considered to be stable if it has twice the assets as compared to its liabilities. This ratio puts it in the favorable books of lenders and investors. The same goes for an individual; liquidity should always outweigh liability.

How can liquid assets be forecasted?
Liquid assets can be forecasted by keeping the upcoming expenses and incoming revenue from sales in mind. By comparing these two figures for the next couple of months, you can get an idea about what your liquid assets will look like.

As a business owner, you would have an idea of what your monthly sales projection is for any given time of the year. This knowledge also helps set business goals and lets you know where you stand and in what areas you need improvement.