Learning About Quick Assets and the Purpose They Serve
By Indeed Editorial Team
Published May 29, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Quick assets can help an organization maintain a healthy balance sheet. They're the highly liquid assets that a company owns, and banks look for them when reviewing loan applications because they indicate a company's ability to repay the loan. You can use liquid assets to help management calculate financial ratios that may be useful in decision-making about future activities for the company. In this article, we explore what quick assets are, why they're important, review the different types, discuss the various formulas used to calculate them, uncover the difference between current and liquid assets, and share some examples.
What are quick assets?
Quick assets, also known as liquid assets, are highly liquid assets that a company can easily convert to cash or are already in cash form. These assets are the accumulation of cash, or any cash equivalent, marketable securities, taxes, prepaid expenses, and accounts receivable. You can also include inventory to calculate financial ratios, like the quick or liquid assets ratio. Companies can typically sell their liquid assets without losing a significant amount of their value. Liquid assets are helpful to companies because they can generally convert or exchange them in less than one year.
Financial institutions consider the number of funds a company has as liquid assets to measure solvency. Business managers consider awareness of liquid assets as one of their primary objectives for this reason. Increasing the number of liquid assets a company has and managing its current liabilities may be a focus for a company that might look for financing in the future. Companies with several liquid assets are usually in an excellent position when they submit loan applications.
Why are liquid assets important?
Organizations and business managers usually want to know their total amount of liquid assets to make better financial decisions. They keep some company assets, like marketable securities, or cash, to meet their financing needs. If a company's assets have a low cash balance, it may be necessary to increase its liquidity using an available line of credit. The type of company can also determine the number of liquid assets a company has. For example, business-to-business (B2B) companies may have significant accounts receivable balances, while companies that sell products to individual consumers may not have the same substantial balance.
The number of liquid assets can also determine an organization's financial situation. A financially healthy business may have many assets, like marketable securities or cash. If a company fulfills its cash needs from a line of credit, the only quick asset that the accountant may show on the balance sheet is accounts receivable. When reviewing commercial loan applications, financial institutions prefer to finance companies that have numerous liquid assets because they can be confident in the business's ability to repay the loan.
Types of liquid assets
Some types of liquid assets that a company may have include:
Cash is a quick asset and refers to the money a company can retrieve easily. Companies usually keep cash available to them in business accounts. Businesses can get cash from payments made on the sale of goods, fees for customer services, and changes to the value of assets.
Accounts receivable is money a company or organization can collect from debtors. Many companies that offer services before receiving payment track their accounts receivable. For example, a plumber may provide services to a client before collecting their fee, which results in an outstanding amount, a receivable.
Inventory is a complete account of all items that an entity or company owns. These assets only include items that the company plans to sell. For example, while a financial institution may consider the clothing on shelves in a warehouse as inventory, they don't consider the shelves the clothing is one to be inventory.
Marketable securities are liquid assets that mature in a year or less. They can include bonds, treasury bills, bonds, money market instruments, and stocks. For example, a company may invest in stocks and quickly sell them to turn them into cash.
Liquid assets formula
Businesses use the liquid assets formula, also known as the quick ratio or acid test, to determine the number of liquid assets they have. They divide the total of their cash, marketable securities, accounts receivable, and cash equivalents by their current liabilities. Current liabilities establish what a business owes and different financial commitments a company may have with banks. Financial institutions usually expect repayment of the loans within one year. The information necessary for the liquid assets formula is usually on a business's balance sheet. Investment professionals determine if a business can meet its financial obligations by using this formula:
Liquid assets ratio = (cash + cash equivalents + short-term investments + accounts receivable) / current liabilities
If a business balance sheet doesn't contain liquid assets, the following formula can calculate the liquid assets ratio:
Liquid assets ratio = (total current assets - inventory - prepaid expenses) / current liabilities
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The difference between liquid assets and current assets
The liquid assets ratio provides a cautious view of a business's ability to pay back its short-term liabilities with its assets, because it doesn't include assets that might be difficult to liquidate. The current ratio is equal to a business's total current assets, including its inventories, divided by its current liabilities. Compared to the current ratio, the liquid assets ratio is a more rigorous test of a business's solvency. The current assets ratio only includes assets that the company can sell within a year or less and liabilities that expire within the same period.
Liquid asset formula examples
When communicating with financial institutions, upper management members usually evaluate the company's liquid assets. Here are some examples of circumstances where banks may require companies to calculate their liquid assets using the liquid assets ratio:
Applying for a loan
Here is an example of how a lender requests copies of the business's financial reports to process its loan application:
Finn Electronics LLC applies for a loan to buy a new building and establish a new store. Its bank representative contacts them and asks for the company's balance sheet to determine the liquid assets ratio. Finn Electronics LLC registered $50,000 in cash, $15,000 in accounts receivable, $20,000 in inventory, $4,000 in stock investments, $3,000 in prepaid taxes, and $40,000 in current liabilities. The financial institution can determine the company's liquid assets by applying the liquid assets ratio formula:
Cash equivalents: $20,000
Short-term investments: $4,000
Accounts receivable: $15,000
Current liabilities: $43,000
Formula: 2.07 = (50,000 + 20,000 + 4,000 + 15,000) / 43,000
The business has a liquid assets ratio of 2.07, which indicates solvency. It's a good ratio because it's greater than one, meaning that Finn Electronics LLC can pay back the loan plus interest and still be able to generate profit and develop new investments.
Submitting a balance sheet
Here is an example of how a company can successfully submit its balance sheet to apply for a loan:
Aileen's Vegan Pastries submits a balance sheet to its financial institution, and its assets show that the company has $2,500 in inventory, $1,500 in prepaid taxes, $25,000 in current assets, and $40,000 in financial commitments. The financial institution can determine the company's liquid assets ratio by applying its formula:
Current assets: $25,000
Prepaid expenses: $1,500
Current liabilities: $40,000
Formula: 0.53 = ($25,000 - $2,500 - $1,500) / $40,000
Aileen's Vegan Pastries has a liquid assets ratio of 0.53. The ratio suggests that the business has a low availability and may have challenges in paying its current liabilities. In this situation, the financial institution may not approve the loan since the company doesn't generate the necessary profit. Aileen's Vegan Pastries may consider selling some of its long-term assets to pay for its current liabilities.
Expanding a business
Here is an example of how a company can determine whether it qualifies for a loan to fund a business expansion:
Mollison Beauty and Self-Care is a small bath and self-care essentials brand that is currently expanding and purchasing new equipment. The business hires a group of professionals to manage the financial areas of the business, including an accountant. One of the accountant's first duties is to assess the organization's liquid assets by creating a balance sheet. This professional registers $6,000 in cash, $1,500 in accounts receivable, $1,000 in inventory, and $6,000 in current liabilities. The accountant can determine the company's liquid assets ratio by applying its formula:
Cash equivalents: $1,000
Accounts receivable: $1,500
Current liabilities: $6,000
Formula: 1.42 = ($8500 - $0) / $6,000
Mollison Beauty and Self-Care has a liquid assets ratio of 1.42. The accountant reports to the upper management that the company's liquid assets ratio is beneficial for their expansion because it may allow them to obtain the financing they require for the new equipment.
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