Liquidity describes a business or person’s ability to easily convert assets into cash to spend or invest as needed. Cash itself is naturally the most liquid of assets, as it’s immediately ready for use and can be disposed of at its market value in exchange for other assets.
Types of asset that could be liquidated includes anything that provides a current, future, or potential economic benefit, such as stock, retail inventory, property, and investments.
Key takeaways from this section:
- Liquidity represents how easy it is to convert an asset at its market value.
- Cash is the most liquid asset as it can be easily and quickly used to obtain other assets.
- Strong liquidity is important for a market or business so goods can be converted without losing their value.
Liquidity represents a measure of how easily something can be used for its market value, ie bought or sold. Different assets have different levels of liquidity, affecting a person or organisation’s ability to make use of those assets.
Cash represents the highest level of liquidity because it can easily be converted into other assets. Other financial assets such as shares or equities may fall further down on the scale of liquidity, but could still be considered as relatively liquid compared to tangible, or physical, assets.
A tangible asset includes items such as property, land, antiques, or fine art, and these are seen as much less liquid as they are harder to quickly convert into cash at their market value.
There are also different types of financial liquidity, including market liquidity and accounting liquidity.
Market liquidity refers to the ability of a company or individual to sell an asset at the market price, ie without drastically changing its value. A liquid market allows assets to be sold and bought relatively easily without any major loss of value. In an illiquid market, assets may have to be heavily discounted and lose their value in order to sell them in a reasonable amount of time.
Accounting liquidity measures the ability of an individual or business to make use of their assets to cover financial obligations such as debts. If a company has illiquid assets that may have to be sold for less than their market value, then they would be considered a business with weak liquidity.
How to calculate liquidity
There are several ways liquidity can be analysed using financial ratios and equations, including the current ratio, which simply measures current assets against current liabilities, or the cash ratio, which only defines liquid assets as ready cash.
Liquidity in practice
If a person wanted to purchase an expensive item, such as a car that cost £12,000, having the cash in the bank would be the most easily available and liquid asset to use to purchase it. They might have other valuable assets such as antiques or fine art, but naturally a salesperson is highly unlikely to accept such items at their market value to pay for the car. If they wanted to liquidate those assets to fund the purchase, it could take a long time to find a buyer willing to pay an acceptable price, which would delay buying the car by quite some time compared to having the cash ready in the bank.
What does liquidity mean in business?
Liquidity measures a company’s ability to convert their assets into cash to cover financial obligations. Assets could include ready cash as well as retail stock or property, with different types of assets more easily liquidated than others.
Is high liquidity good?
Measuring liquidity with a current or cash ratio can give a basic indication of financial health, and a rating over 1.0 means a business should be less likely to run into financial difficulties. However, this can vary across different types of businesses and with different industry norms.
What are the most liquid assets?
The most liquid asset is cash, followed by any asset that can be quickly turned into cash such as stocks and bonds. Anything that can be easily converted to cash within the financial year would also be considered a liquid asset.
Have you thought about Invoice Finance as a cash flow solution for your business?
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
The benefits of invoice finance companies such as Novuna Business cash flow
Want to understand more Cash Flow Finance terms?
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Competent staff, slick technology. Would recommend
Halo is one of the smartest bits of tech I have seen & every team is only as good a it's people and I would like to take this time to actually specifically point out Alex Hall & Claire Davies. Alex is an account manager that has continually improved during our time working together and is a real credit to Novuna. Claire has been exceptional from start to finish; meticulous in her work and very patient with us at every temp - an absolute star. It is a shame that the email address went to a generic platform and not each individual. I totally understand why this works better for companies but it did mean that the personal element was lost meaning that starts like Claire will be harder to identify from a customer point of view.
High recommedation for Novuna Business Cashflow.
My company was in need of invoice factoring to assist with the cashflow due to the nature of debtor days with our clients. After looking at a number of options, the right decision was made to work in partnership with Novuna Business Cashflow. Right from setup through sales to customer service, the communication and support has been outstanding. Providing me with all the information I needed regarding new clients coming onto our books. The system they use is so user friendly and the drawdown payments are very efficient in the fast moving world of temporary payroll. This has allowed my company to look at positive growth knowing we are safe financial hands. I would highly recommend Novuna Business Cashflow 10/10.
Set up went well and communication was good.
Syed and Vipul were extremely helpful top class service
Very helpful from the start
Great people made this process very straightforward.
Jemma from Novuna (formally Hitachi) was brilliant. Worked with us throughout the process and succeeded when some others had failed. Carried out the necessary checks with a smile and cheery demeanour, making what would have been a laborious process quite manageable.
Teething problems -Maybe ?
It's still early days so I may alter this review at a later date. However with retentions and concentration limits and other items, were finding were not getting 85% up front, were probably getting nearer 70% Also when a customer pays the remaining allegedly 15% due to us seems not to be credited to become available. For instance a customer paid Â£6918 and a customer paid Â£1300 hence we should see an extra Â£1330 available (15% of both these payments). However availability seemed to go down and not up by Â£1330 !!! Hard to work out where this 15% has actually gone ? I'll re-submit this review when things become clearer.
I found Hitachi true to their world in every aspect of the service they promised. I can't recommend enough.
Excellent Customer care and service.
Excellent customer service from start of initial conversations, right through to finally becoming a customer. The whole team involved are a credit to Hitachi, they were accommodating and informative the whole way along the process. I would highly recommend Hitachi to future clients and business associates. Thanks Alan.
I really enjoyed working with the Hitachi team, professional, helpful and really good people to deal with. They have made what could have been a very difficult experience a pleasure. Very happy to recommend them.
Hitachi made the process of moving factoring facilities painless, bearing in mind we previously had our facility with the same provider since 1997. I cant fault Hitachi's staff and processes and we are delighted with the move.
Staff excellent all together professional
Great service so far
From start to finish the process for transferring our invoice finance to Hitachi has been been brilliant, a smooth transition, great communication our link Person Jonathan Oakes has helped the process go through seamlessly, A great experience so far and a brilliant start to what we hope will be a long term partnership.