Liquidity of money, its calculation. Types of assets by liquidity
Do you know how easy it is to cash outown 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 accountingcharacterizes the ease 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 in the market. The 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:
It should be borne in mind that in this list of assetsenterprises 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, the liquidity of cash is a benchmark for all other types of assets.
Liquidity is a measure of a borrower's abilitypay your debts on time. It is often characterized by a coefficient or percentage. By liquidity they understand 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 keep in mind that some assets are difficult to sell for full cost in a hurry.
- Coefficient of quick liquidity. For its calculation, reserves and accounts receivable 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 legalsystems correctly 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. For an enterprise with a stable cash flow, the ratio of the quick liquidity ratio is lower than the Internet start-up.
This concept is key not only in theaccounting, 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 at all it does not bring, and the percentage on money on the current account is usually more than modest. Therefore, enterprises and banks are trying to reduce the amount of highly liquid assets to the required standard. A slightly different meaning has this concept 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 individual individuals. A person can be rich if they count all the assets in his property, but fail to pay off on time in short-term obligations, because he can not 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.