Is inventory a liquid asset?
The expression "liquid funds" defines the The inventory of funds and assets of a company that are available for payment or that can be converted into money in a very short time, i.e. are liquid or can be made liquid in the short and medium term. Liquid (liquid) funds are primarily Cash holdings (Cash on hand) and Bank balance as well as realizable assets such as discountable Bills of exchange, checks and securities.
A company must always have a certain part of its assets in liquid form in order to be able to pay invoices and costs incurred on time and in full at any time. If there is a persistent severe shortage of cash in a company, it is considered insolvent, which results in bankruptcy. Liquid funds are positioned in the balance sheet on the assets side in current assets.
Cash and cash equivalents in order of priority
Liquid funds are divided into three orders according to the "liquidity" (convertibility into money / cash) of the current assets, which are sorted in order of decreasing liquidity.
To the liquid funds of the 1st order (highest rank) include the existing cash and cash equivalents as well as bank balances. Assets that can be transformed easily and quickly, such as checks, discountable bills of exchange, marketable securities and trade accounts receivable form the 2nd order.
To the liquid funds of the 3rd order are relatively expensive and medium-term convertible assets of the current assets such as inventories, finished products, semi-finished products as well as raw materials, consumables and supplies.
Valuation of liquid funds
Liquid funds are to be valued at their nominal value. The face value of the means of payment in the European Economic and Monetary Union (EMU) is 1 euro. Liquid funds on foreign currency items, such as credit balances in US dollar accounts, are converted at the respective rate on the reporting date. A need for devaluation can arise with foreign currency balances and also with non-valuable checks.
Basic regulation for holding liquid funds
The liquidity provision serves to close gaps in coverage or to avoid payment deficits. With a high level of liquid funds, bankruptcy is on the one hand prepared on the other hand, no interest or profits are generated with "dormant" funds. The aim is to keep an appropriate optimum. The principle applies: to create as high a level of liquid funds as necessary and to keep it as low as possible. Liquid funds that are not required can be invested profitably.
The most important information about "Liquid funds" at a glance:
Liquid funds are:
- available means of payment to settle financial obligations
- Cash and bank balances
- Checks, bills of exchange, securities, receivables from deliveries and services to be cashed at short notice
- In the medium term liquidable inventories, finished products, semi-finished products, raw materials, consumables and supplies
- to be valued at nominal value and converted at the closing rate for foreign currency items
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