What is liquidity?

All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount. Cash is the most liquid asset, followed by cash equivalents, which are things like money market accounts, certificates of deposit (CDs), or time deposits. Marketable securities, such as stocks and bonds listed on exchanges, are often very liquid and can be sold quickly via a broker. Liquid assets are important because a company consistently needs cash to meet its short-term obligations.

Non-current assets are listed next because they are not as easily converted to cash. These factors can be important for individuals and investors when allocating for liquid vs. non-liquid assets and making investment decisions. In business, liquid assets are important to manage for both internal performance and external reporting. A company with more liquid assets has a greater capability of paying debt obligations as they become due. Some marketable securities are considered liquid based on the underlying asset. Examples may include stocks, bonds, preferred shares of stock, index funds, or ETFs.

Requirements on the Value of Liquid Assets

In short, the order of liquidity concept results in a logical sort sequence for the assets listed in the balance sheet. For example, if a company has cash on hand but also holds patents they can sell, the company may decide to sell the patents in order to raise cash order of liquidity for assets quickly. It is a list of a company’s assets showing how quickly they can convert those assets to cash. The most common liquidity ratios are the current ratio and the quick ratio. Is your car rare, expensive, or custom (in which sellers may be disinterested)?

The most liquid assets are cash and securities that can immediately be transacted for cash. Companies can also look to assets with a cash conversion expectation of one year or less as liquid. This broadens the scope of liquid assets to include accounts receivable and inventory. To measure how well a company will meet its short-term debt obligations, a company should be mindful of its liquid assets.

The order of liquidity is typical: cash, fixed assets, liquid assets, and non-liquid assets

Finally, the vast majority of liquid assets also are the type most commonly owned by investors. That is, they’re things like stocks, or other easily sold securities such as US Treasury bonds. Cash, of course, also fits the bill, as it can be used by anyone at any time. But liquid assets tend to include things like money in bank accounts, certificates of deposit (CDs), and even certain types of bonds such as US Treasuries. This ratio measures the extent to which owner’s equity (capital) has been
invested in plant and equipment (fixed assets). A lower ratio indicates a proportionately
smaller investment in fixed assets in relation to net worth and a better cushion
for creditors in case of liquidation.

Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources. A specimen of the balance sheet marshalled using order of permanence is shown below. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.