What is Liquid Capital? (Liquid Assets and Non-Liquid Assets)
What is Liquid Capital?
Liquid capital refers to the amount of cash or assets that can be easily converted into cash within a short period of time.
Cash, checking and savings accounts, short-term investments and marketable securities are all liquid assets.
Companies utilize liquid capital as an important measure of financial health and stability. It shows how much working capital the company has available to cover its short-term obligations, such as paying bills and debt liabilities.
A company with high levels of liquid capital is generally seen as more financially stable and less risky. Businesses, particularly franchisors, track liquid assets as reported on their balance sheet as current assets.
On an individual level, liquid capital can refer to the amount of cash or assets that an individual has available to meet their short-term financial needs, such as paying bills, making purchases, and covering emergencies.
Understanding how much of one’s net worth is liquid can be helpful in tracking personal finances.
6 Examples of Liquid Capital
It’s important to note that not all assets are considered liquid investments. The following assets are short-term, liquid investments:
1. Cash & Cash Equivalents
This includes physical currency, certificates of deposit (CDs), as well as funds that are on hand in checking accounts, money market accounts and savings accounts. Savings accounts and money market accounts typically pay higher interest rates than an individual will make with just a checking bank account.
2. Short-term investments
These are investments that can be easily converted into cash within a short period of time, such as money market funds, Treasury bills, Treasury notes and commercial bonds.
3. Accounts Receivable
This refers to money a company is owed by its customers for goods or services that have been delivered but not yet paid for. They are typically short-term debts expected to be collected within one year.
4. Marketable securities
These are financial instruments that can be easily bought and sold on financial markets, such as stocks, bonds, and mutual funds.
Credit cards, lines of credit, and other forms of credit can be considered liquid capital, as they provide access to cash that can be used to meet short-term financial needs.
6. Precious metals
Gold, silver, and other precious metals can be considered liquid capital, as they can be easily sold for cash.
What is the Difference Between Investment Capital and Liquid Capital?
Investment and liquid capital are both forms of financial resources that can fund various business or personal endeavors. However, there are some key differences between the two:
- Time horizon: Investment capital is typically used to fund long-term projects or investments, while liquid capital is used to meet short-term financial needs.
- Risk: Investment capital is typically invested in assets that may have a higher level of risk but also offer the potential for higher returns. On the other hand, liquid capital is invested in more stable, low-risk assets that can be easily converted into cash.
- Use: Investment capital is typically used to purchase assets that will generate income or appreciation over time, such as stocks, real estate, or businesses. Liquid capital, on the other hand, is used to meet immediate financial needs, such as paying bills and covering emergencies.
- Liquidity: As the name suggests, liquid capital is highly liquid, meaning it can be easily converted into cash within a short period of time. Investment capital, on the other hand, could be less liquid, as it may be tied up in long-term investments that cannot be easily sold or accessed.
In summary, investment capital is typically used to fund long-term projects and investments, while liquid capital is used to meet short-term financial needs.
What is Non-Liquid Capital?
Non-liquid assets, or illiquid assets, are types of assets that cannot be easily converted into cash within a short period of time. These assets may include things like real estate, businesses, and physical assets such as equipment and machinery.
Some examples of non-liquid assets include:
- Real estate: Property, such as land and buildings, is generally considered a non-liquid asset, as it can take time to sell and the sale price may vary based on market conditions.
- Businesses: Owning a business can be considered a non-liquid asset, as it can take time to sell and the value of the business may be difficult to determine.
- Physical assets: Equipment, machinery and other physical assets that are used in a business are generally considered non-liquid assets, as they may take time to sell and their value may depend on their condition and the demand for similar assets.
- Collectibles: Art, antiques and other collectibles are generally considered non-liquid assets, as they may take time to sell and the value of the item may depend on the market demand for similar items.
- Long-term Investment Accounts: Retirement accounts such as traditional and Roth IRAs can trigger penalties for early withdrawals. While technically, the capital held in these accounts is relatively liquid, the ability to access it comes at a cost that makes the account less liquid.
Non-liquid assets are important to consider when planning for financial stability and security, as they may not be easily accessible in times of financial need. It’s generally recommended to have a mix of liquid and non-liquid assets to ensure that you have the resources you need to meet your financial obligations and goals.
One risk of illiquid assets is that if a business owner or investor needs to quickly convert capital to cash, they may have to sell for lower prices than the current market value.
The Bottom Line
Liquid assets are financial instruments that can be easily and quickly converted into cash. These assets can include cash, checking and savings accounts, short-term investments and marketable securities.
Both companies and individuals might find it important to track liquid capital to help with budgeting and accounting. Working capital can be used to meet short-term liabilities such as paying bills and covering emergencies.
Non-liquid assets are typically investments that can’t easily be converted into cash, or have a long-term holding period. Illiquid assets include most physical assets such as real estate, Contemporary Art, collectibles and business equipment.
Investors and companies alike typically have a diversified portfolio that includes both liquid and non-liquid assets. Non-liquid assets can be important for long-term financial planning and stability, but they can’t be relied on in times of emergency.
Gain Liquidity in the Art Market with Masterworks
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The secondary market provides added liquidity for investors which is especially important when investing in collectibles, which tend to be highly illiquid, long-term investments. The secondary market platform gives investors access to buyers and sellers to offload shares prior to the final exit of the investment.
This minimizes one of the largest risks of investing in illiquid assets, allowing investors to more easily invest in a diversified portfolio across both liquid and illiquid assets.
This material is provided for educational purposes only. It is not investment advice and should not be the basis of an investment decision.