Liquidity of money, its calculation. Types of assets by liquidity

Do you know how easy it is to cash out your own funds? It all depends on the form in which they are stored. Liquidity of money is the basic concept in accounting, finance and investment. It reflects the ability of assets to transform from one form to another. Desirable for any company is the outcome, when this operation occurs quickly and without significant financial losses. Therefore, cash is still so important , the liquidity of which is considered absolute. Our article begins with the definition of this concept. Then we turn to the consideration of 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 accounting characterizes the simplicity of converting assets available to the enterprise into cash. The latter can be used to buy anything at any time. Absolute liquidity of money concerns only cash. Savings on the current card account can not be used to purchase vegetables from the farmer on the market. Money on the deposit is even less liquid. This is due to the fact that they can not be obtained instantly. In addition, early termination of the contract with the bank is often fraught with additional financial losses.

Money, liquidity and asset types

The means available to the enterprise take the following forms:

1. Cash.
2. Funds on current accounts.
3. Deposits.
4. Bonds of savings loan.
5. Other securities and derivative banking instruments.
6. Goods.
7. Shares of closed joint-stock companies.
8. Various collectibles.
9. The property.

It should be borne in mind that in this list the assets of the company are located in order of decreasing liquidity. Therefore, one must understand that the availability of real estate is not a guarantee against insolvency in times of crisis, since it may take weeks, if not years, to sell it. The decision to invest money in any type of assets should be based on the level of its liquidity. However, it is not necessary to sell some values in order to get cash quickly. Money can be borrowed from the bank on bail, for example, real estate. However, such an operation involves financial and time costs. Therefore, liquidity of cash is a benchmark for all other types of assets.

In accounting

Liquidity is a measure of a borrower's ability to pay his debts on time. It is often characterized by a coefficient or percentage. Liquidity is understood as the ability of an enterprise to pay its short-term obligations. The easiest way to do this is with cash, because they are easily converted into all other assets.

Calculation of liquidity

There are several ways to calculate this indicator for the balance of the enterprise. These include the following:

• Coefficient of current liquidity. Its easy 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, one must bear in mind that some assets are difficult to sell for full value in a hurry.
• Coefficient of quick liquidity. For its calculation, reserves and receivables are taken from current assets.
• Coefficient of operating cash flow. Liquidity of money is considered absolute. This indicator is calculated by dividing the available cash into current liabilities.

Using the coefficients

For various industries and legal systems, it is appropriate to use individual indicators. For example, enterprises in developing countries need a greater level of liquidity. This is due to the high level of uncertainty and the slow return on investment of funds. For an enterprise with a stable cash flow, the rate of the quick liquidity ratio is lower than the Internet start-up.

Market liquidity

This concept is key not only in accounting, but also in banking. Insufficient liquidity is often the cause of bankruptcy. However, an excessive amount of cash can also lead to it. The less liquidity of assets, the more income from them. Cash in general is not brought, and the percentage of money in the current account is usually more than modest. Therefore, enterprises and banks are trying to reduce the number of highly liquid assets to the required rate. A slightly different meaning has this concept in relation to stock exchanges. The market is considered liquid if securities on it can be sold quickly and without loss in their prices.

conclusions

Liquidity is an important concept for both large corporations and individual individuals. A person can be rich if they count all the assets in his property, but fail to pay off on time for his short-term obligations, as he will not be able to convert them into cash on time. This 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.