Do you know how easy it is to cash outown funds? It all depends on the form in which they are stored. The liquidity of money is a basic concept in accounting, finance and investing. It reflects the ability of assets to transform from one form to another. A desirable outcome for any company is when this operation takes place quickly and without significant financial loss. Therefore, cash is still so important, the liquidity of which is considered absolute. We begin our article with the definition of this concept. Then we proceed to consider the types of assets, financial performance of the enterprise and the role of banks in maintaining a certain level of liquidity.
Definition of concept
Liquidity of money in accountingcharacterizes the ease of converting the assets at the disposal of an enterprise into cash. The latter can be used to buy anything at any time. Absolute liquidity of money applies only to cash. The savings on the current card account can not be used to buy vegetables from a farmer in the market. Deposit money is even less liquid. This is due to the fact that they can not be obtained instantly. Moreover, early termination of an agreement with a bank is often fraught with additional financial losses.
Money, liquidity and asset types
The funds at the disposal of the enterprise take the following forms:
- Cash.
- Funds on current accounts.
- Deposits
- Bonds Savings Loan.
- Other securities and derivative banking instruments.
- Products.
- Shares of closed joint stock companies.
- Various collectibles.
- The property.
In accounting
Liquidity is a measure of a borrower's abilitypay your debts on time. It is often characterized by a coefficient or percentage. By liquidity is understood the ability of an enterprise to pay its short-term liabilities. The easiest way to do this is with cash, since they are easily converted into all other assets.
Liquidity calculation
There are several ways to calculate this indicator for the balance sheet. They include the following:
- Current liquidity ratio.It is the easiest to calculate. This ratio is equal to the result of dividing all current assets by the same liabilities. It should be approximately equal to one. However, it must be borne in mind that some assets are difficult to sell at full value in a hurry.
- Quick ratio. For its calculation from current assets take away stocks and accounts receivable.
- The ratio of operating cash flow. The liquidity of money is considered absolute. This indicator is calculated by dividing the available cash into current liabilities.
Using coefficients
For various industries and legalsystems to use individual indicators correctly. For example, enterprises in developing countries need more liquidity. This is due to the high level of uncertainty and the slow return on investment. For an enterprise with a stable cash flow, the rate of quick liquidity ratio is less than an Internet startup.
Market liquidity
This concept is key not only inaccounting, but also in banking. Lack of liquidity is often the cause of bankruptcy. However, an excessive amount of cash can also lead to it. The less liquidity of assets, the greater the income from them. Cash generally does not bring it, and the percentage of money in the current account is usually more than modest. Therefore, enterprises and banks seek to reduce the number of highly liquid assets to the required rate. This concept has a slightly different meaning in relation to stock exchanges. The market is considered liquid if the securities on it can be sold quickly and without loss in their prices.
Liquidity is an important concept for bothlarge corporations, and for individuals. A person can be rich if you count all the assets in his property, but fail to pay their short-term liabilities on time, because they will not be able to convert them into cash in time. This also applies to companies. Therefore, it is so important to understand what liquidity is and to acquire assets in accordance with its normal level for the industry and the state.
