Net Liquid Assets

What Are Net Liquid Assets?

Net liquid assets are a measure of an immediate or close term liquidity position of a firm, calculated as liquid assets less current liabilities. Liquid assets are cash, marketable securities, and accounts receivables that can be promptly changed over completely to cash at their estimated current value.

Figuring out Net Liquid Assets

The amount of net liquid assets is a very rare example of measures that gives a snapshot of the financial condition of a firm. Cash and marketable securities are ready to send, while accounts receivables could be transformed into cash inside a short period of time, however maybe not totally as there is ordinarily a small percentage of bad debt associated with aged receivables. Inventory doesn't qualify as a liquid asset since it can't be promptly sold without a critical discount.

Current liabilities primarily include accounts payable, accrued liabilities, income tax payable, and a current portion of long-term debt for the average company. Deducting current liabilities from the above liquid assets shows the financial flexibility of a company to make a quick payment.

Benefits of Net Liquid Assets

Having a strong net liquid asset position is important for a firm since it demonstrates that a firm can pay off its short-term obligations, like paying providers and paying off short-term debt. It likewise implies that a company can make new investments, like the purchase of equipment, without taking on financing.

Companies that have a strong net liquid asset position are likewise better positioned in times of economic downturns. They are in a position to face the hardship by depending on its liquid assets to keep paying its short-term obligations even on the off chance that business isn't blasting.

Then again, a company that doesn't have a strong net liquid asset position and no critical revenues in an economic downturn can not meet its obligations and may need to declare bankruptcy.

Having net liquid assets likewise makes it simpler to receive financing from a bank as it demonstrates the ability of a company to pay off its loans, even in times of distress. This likewise results in ordinarily getting a better interest rate on a loan.

However having net liquid assets is a positive position to be in, having too numerous liquid assets isn't the most beneficial utilization of cash, as it very well may be invested and earning a return somewhere else, as opposed to sitting inactively in a bank account. On the other hand, it can likewise be utilized to pay dividends to shareholders.

There is a fine balance that a company must strike between an adequate number of liquid assets and too numerous liquid assets. The common guideline of thumb is that in the event that a business has six months of liquid assets to meet short-term obligations and cover operating expenses, it is in a decent position financially.

Real World Example

The Container Store Group, Inc. as of Dec. 30, 2017, had the accompanying parts on its balance sheet for current assets and current liabilities:

Current Assets

Cash: $22.7 million
Accounts Receivables: $29.5 million
Inventory: $110.5 million
Prepaid Expenses: $11.7 million
Income Tax Receivable: $1.5 million
Other Current Assets: $10.3 million

Current Liabilities

Accounts Payable: $53.8 million
Accrued Liabilities: $73.5 million
Current Portion of Long-Term Debt: $9.5 million
Income Tax Payable: $1.7 million

Net liquid assets as of this date would be Cash + Accounts Receivables - Current Liabilities = $22.7 million + $29.5 million - $138.5 million = - $86.3 million. The negative net liquid position of the company might be a concern, yet this situation is run of the mill for a retailer. In any case, it shows that the company isn't in the best financial position, especially assuming that the economy gets really ugly.

Features

Having too numerous liquid assets, notwithstanding, demonstrates an idle utilization of cash, by which the money could be put to better utilize, like different investments or paying out dividends.
Net liquid assets are a measure of the close term liquidity position of a firm, calculated as liquid assets less current liabilities.
Having a net liquid asset position connotes a company is healthy and can pay its short-term obligations, like paying providers and paying down short-term debt.
Liquid assets incorporate cash, marketable securities, and accounts receivables. They are any assets that can be quickly changed over into cash.
A net liquid asset position likewise demonstrates that a company can make new investments without taking on financing.