# Net Liquid Assets: Meaning, Advantages, and Example

![Net Liquid Assets](https://www.investopedia.com/thmb/8IhGXmgV5TLcz6rv95l5Su3GAng=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Term-n-net-liquid-assets-071b5e1d926e46f68c214da5b5867b10.jpg)

*Net liquid assets provide insight into a company's ability to meet its short-term obligations. — Investopedia / Ryan Oakley*

> **Definition**
>
> Net liquid assets are the liquid assets that remain after a company’s immediate liabilities are deducted from them.

## What Are Net Liquid Assets?

Liquid assets include cash, marketable securities, and accounts receivables that can be readily converted to cash at their approximate current value. They reflect a company’s financial condition. Net liquid assets can be determined by subtracting its [current liabilities](https://www.investopedia.com/terms/c/currentliabilities.asp) from its [liquid assets](https://www.investopedia.com/terms/l/liquidasset.asp). They're what's left.

### Key Takeaways

*   Liquid assets include cash, marketable securities, and accounts receivables. They are any assets that can be quickly converted into cash.
*   Having a net liquid asset position signifies a company is in good health and is able to pay its short-term obligations, such as paying suppliers and paying down short-term debt.
*   A net liquid asset position also demonstrates that a company can make new investments without having to take on financing.
*   Having too many liquid assets, however, demonstrates an idle use of cash, whereby the money could be put to better use, such as other investments or paying out dividends.

## Understanding Net Liquid Assets

The amount of net liquid assets is one of a few measures that gives a snapshot of the financial condition of a firm. Cash and [marketable securities](https://www.investopedia.com/terms/m/marketablesecurities.asp) are ready to deploy, while accounts receivables could be turned into cash within a short period of time, though perhaps not completely as there is typically a small percentage of [bad debt](https://www.investopedia.com/terms/b/baddebt.asp) associated with aged receivables. [Inventory](https://www.investopedia.com/terms/i/inventory.asp) does not qualify as a liquid asset because it cannot be readily sold without a significant discount.

Current liabilities mainly encompass accounts payable, accrued liabilities, income tax payable, and a current portion of [long-term debt](https://www.investopedia.com/terms/l/longtermdebt.asp) for the average company. Subtracting current liabilities from the above liquid assets shows the financial flexibility of a company to make a quick payment.

## Advantages of Net Liquid Assets

Having a strong net liquid asset position is important for a firm because it demonstrates that a firm is able to pay off its short-term obligations, such as paying suppliers and paying off [short-term debt](https://www.investopedia.com/terms/s/shorttermdebt.asp). It also signifies that a company is able to make new investments, such as the purchase of equipment, without having to take on [financing](https://www.investopedia.com/terms/f/financing.asp).

Companies that have a strong net liquid asset position are also better placed in times of economic downturns. They are in a position to weather the storm by relying on its liquid assets to continue paying its short-term obligations even if business is not booming.

On the other hand, a company that does not have a strong net liquid asset position and no significant revenues in an economic downturn will not be able to meet its obligations and may have to declare [bankruptcy](https://www.investopedia.com/terms/b/bankruptcy.asp).

Having net liquid assets also makes it easier 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 also results in usually receiving a better [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) on a loan.

Though having net liquid assets is a positive position to be in, having too many liquid assets is not the most beneficial use of cash, as it could be invested and earning a return elsewhere, rather than sitting idly in a bank account. Conversely, it can also be used to pay [dividends](https://www.investopedia.com/terms/d/dividend.asp) to [shareholders](https://www.investopedia.com/terms/s/shareholder.asp).

There is a fine balance that a company must strike between enough liquid assets and too many liquid assets. The general rule of thumb is that if a business has six months of liquid assets to meet short-term obligations and cover [operating expenses](https://www.investopedia.com/terms/o/operating_expense.asp), it is in a good position financially.

## Example of Net Liquid Assets

Say that XYZ Widgets, Incorporated has the following components on its balance sheet for [current assets](https://www.investopedia.com/terms/c/currentassets.asp) and current liabilities:

**Current Assets**

*   _Cash_: $22.7 million
*   _Accounts Receivable_: $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 may be a concern, but this situation is typical for a retailer. Still, it indicates that the company is not in the best financial position, particularly if the economy takes a turn for the worse.

## What Are Common Examples of Liquid Assets?

A liquid asset is an asset that can be easily and quickly converted into cash. Examples of liquid assets may include cash, cash equivalents, money market accounts, marketable securities, short-term bonds, and accounts receivable.

## Why Are Net Liquid Assets Important?

Net liquid assets are important because a company consistently needs cash to meet its short-term obligations. Without cash, a company can't pay its bills to vendors or wages to employees. Liquid assets are also needed in case a short-term emergency arises that requires money to be spent.

## What Is the Difference Between a Liquid Asset and Illiquid Asset?

A liquid asset is an item of future economic benefit to a company that can easily be exchanged for cash. On the other hand, illiquid assets are more difficult to sell. Examples of illiquid assets would include real estate & land, vehicles, equipment & machinery, and certain over-the-counter (OTC) securities, among others.