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Liquid finance is an important property to have if you need fast funds later. In the world of investment and finance, Liquid finance are a term that is often mentioned. But actually, what are Liquid finance? Basically, this is an asset that can be converted into cash easily without any decrease in value.
Therefore, it is not surprising that Liquid finance are called the best type of investment that can be chosen. To find out more clearly, let’s look at the meaning liquid finance and its types in the following article!
What are Liquid finance?
What are Liquid finance? The definition of Liquid finance is the wealth or property of companies or individuals that are easily disbursed into cash in a short period of time. An example of a liquid asset, for example, is cash that is easily accessible without giving a decrease in value.
Other types of property can also be classified as these assets when they have the same nature. The presence of Liquid finance is what is needed if a certain amount of funds needs to be accessed in a fast time.
The Importance of Asset Liquidity
As previously explained, Liquid finance are an important type of property if they want to be accessed in a short period of time. Of course, the role of liquidity of these assets can help alleviate when there is a financial condition that needs to be handled with fast funds.
For example, such as illness, accidents, being affected by termination of employment (layoffs), or maybe to meet household needs. Thus, you can feel at ease because the ownership of Liquid Financial is a solution in dealing with financial problems quickly.
If you’re going to apply for a home loan or other property, ownership of Liquid Financial is something lenders often consider. The reason is, the Liquid finance owned can describe the ability to pay installments when your financial condition is down.
In investing, Liquid finance are also a consideration. Therefore, it is important for individuals and companies to diversify assets based on their respective liquidity.
Types of Liquid finance
There are several types of Liquid finance that can be used for short-term needs. In this case, it means that Liquid Financial are assets that can be disbursed into cash or are easily sold quickly. Some of the types of Liquid finance include the following:
- Precious Metals/Gold
- Government bonds
- Money Market Assets
- Bank Indonesia Certificate (SBI)
- Exchange-traded Funds (ETFs)
- Equity Securities
- Saleable Debt Securities
- Difference between Liquid and Non-Liquid finance
In addition to Liquid finance, of course, there are assets that are non-liquid. So, what is the difference between the two?
If Liquid finance are a type of property that is easily converted into cash without lowering their value in the short term, then non-Liquid finance are difficult to cash out quickly. Examples are land, houses, apartments, shophouses, and various other assets that are difficult to sell quickly when you are pressed for funds.
This is because non-Liquid Financial usually have a high enough value that buyers need to be really capable first before buying them. In addition, non-Liquid finance themselves when converted or disbursed into cash can experience significant changes in value compared to the original.
How to Build Liquid Financial
Holding a portion of your total net worth in Liquid finance is essential to healthy long-term financial planning. Of course, ownership of Liquid Financial is useful if you have emergency needs. It would be wise if your Liquid finance could cover about three to six months of urgent expenses.
If you do not have enough money to set aside in an emergency fund deposit, then you can start considering the assets owned. For example, you can start looking at which assets are non-liquid or difficult to cash out into cash in no time. You can consider liquidating some of them to finance emergency fund needs.
If you don’t have any non-Liquid finance to liquidate, set aside at least a portion of your personal salary to start raising funds. One of the steps to store liquid asset types is to use a savings account that has a high yield.
Once the assets that can be collected on the account are solid, then you can start using them for less liquid ones in order to achieve long-term financial goals.
How to Measure Liquidity
Liquidity is one of the benchmarks used by investors and other stakeholders to assess a company’s ability to repay its short-term debt. Well, financial analysts will usually calculate the ratios below when it comes to measuring the liquidity of those finances.
Why is there more than one type of ratio used? Every analyst or investor has their own standards in measuring liquidity, ranging from the most stringent calculations to the easiest ones.
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Here are the various ratios you need to know.
1. Current ratio
The first liquidity ratio is the current ratio, which is a measurement that is not too tight and the easiest. This ratio is very simple because it only measures the comparison of current assets (assets that can be disbursed within a period of one year) with current debt (debt that must be paid within one year).
The formula is:
Current Ratio = Current assets / Current debt
2. Quick ratio
Quick ratio is usually also called acid-test ratio which is a fairly strict measurement to calculate liquidity. There are some assets that are not counted in this ratio, namely inventories and other current assets that are assessed as not as liquid as cash, receivable accounts or receivables, and short-term investments.
The formula is:
Quick Ratio = (Cash + Short-term investments + Receivables) / Current debt
3. Acid-test ratio (variation)
Unlike the above types, there are other variations in the acid-test ratio that allow companies to calculate inventory. That way, later the result ratio can be greater and help the company.
The formula is:
Acid-Test Ratio (Variation) = (Current assets – Inventory – Cost paid in advance) / Current debt
4. Cash ratio
The tightest liquidity ratio is the cash ratio. Because, he really only measures cash or assets that are commensurate with cash without considering other types of assets including current assets. This is done so that the company can measure its ability to repay debt in the worst-case scenario. For example, when the company does not have time to disburse its other assets at all.
The formula is:
Cash Ratio = Cash or assets comparable to cash / Current debt
Thus an explanation of the meaning of Liquid finance to their types. From this description, it can be concluded that Liquid Financial are types of assets that can be traded easily. These assets are also often used for daily purposes because they have relatively fast access.