Liquidity describes a business or person’s ability to easily convert assets into cash to spend or invest as needed. Cash itself is naturally the most liquid of assets, as it’s immediately ready for use and can be disposed of at its market value in exchange for other assets.
Types of asset that could be liquidated includes anything that provides a current, future, or potential economic benefit, such as stock, retail inventory, property, and investments.
Liquidity represents a measure of how easily something can be used for its market value, ie bought or sold. Different assets have different levels of liquidity, affecting a person or organisation’s ability to make use of those assets.
Cash represents the highest level of liquidity because it can easily be converted into other assets. Other financial assets such as shares or equities may fall further down on the scale of liquidity, but could still be considered as relatively liquid compared to tangible, or physical, assets.
A tangible asset includes items such as property, land, antiques, or fine art, and these are seen as much less liquid as they are harder to quickly convert into cash at their market value.
There are also different types of financial liquidity, including market liquidity and accounting liquidity.
Market liquidity refers to the ability of a company or individual to sell an asset at the market price, ie without drastically changing its value. A liquid market allows assets to be sold and bought relatively easily without any major loss of value. In an illiquid market, assets may have to be heavily discounted and lose their value in order to sell them in a reasonable amount of time.
Accounting liquidity measures the ability of an individual or business to make use of their assets to cover financial obligations such as debts. If a company has illiquid assets that may have to be sold for less than their market value, then they would be considered a business with weak liquidity.
There are several ways liquidity can be analysed using financial ratios and equations, including the current ratio, which simply measures current assets against current liabilities, or the cash ratio, which only defines liquid assets as ready cash.
If a person wanted to purchase an expensive item, such as a car that cost £12,000, having the cash in the bank would be the most easily available and liquid asset to use to purchase it. They might have other valuable assets such as antiques or fine art, but naturally a salesperson is highly unlikely to accept such items at their market value to pay for the car. If they wanted to liquidate those assets to fund the purchase, it could take a long time to find a buyer willing to pay an acceptable price, which would delay buying the car by quite some time compared to having the cash ready in the bank.
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
Liquidity measures a company’s ability to convert their assets into cash to cover financial obligations. Assets could include ready cash as well as retail stock or property, with different types of assets more easily liquidated than others.
Measuring liquidity with a current or cash ratio can give a basic indication of financial health, and a rating over 1.0 means a business should be less likely to run into financial difficulties. However, this can vary across different types of businesses and with different industry norms.
The most liquid asset is cash, followed by any asset that can be quickly turned into cash such as stocks and bonds. Anything that can be easily converted to cash within the financial year would also be considered a liquid asset.
Hitachi made the process of moving factoring facilities painless, bearing in mind we previously had our facility with the same provider since 1997. I cant fault Hitachi's staff and processes and we are delighted with the move.
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