Accounting: What are liquid assets?

In accounting, the term liquid assets refers to various items. Liquid assets are of high importance as they represent the most important means of payment.

Importance of Liquid Assets

Since liquid assets are significant as a means of payment, they are separately listed in the balance sheet. The inventory of means of payment is an indicator to estimate whether a company can finance future investments with its own resources or not. The amount of liquid assets can vary greatly and is therefore not very meaningful. However, long-term changes in liquid assets allow more accurate conclusions about the development of a company.

Analysts often focus on a company's Free Cash Flow, which indicates the amount derived from business activities and not used for investments.

Components of liquid assets include:

• Cash
• Credits
• Coupons due for payment for interests and dividends
• Securities (provided they can be sold at any time and without significant fluctuations in value)

The valuation of liquid assets generally poses no problem. If necessary, foreign currency positions need to be converted into the local currency. Securities can be valued at market price if they are marketable.

For young entrepreneurs, the Cash-Burn-Rate is of particular interest. It indicates how long the liquid assets will last to finance business activities. This allows a young entrepreneur to estimate how much time he has until his company must generate the necessary revenue.

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