The Trouble With Illiquidity
June 14, 2009 by Tisa Silver
Filed under Finance
Illiquid “troubled assets“ have caused corporate balance sheets to go down the tubes. Do you have any illiquid assets on your books?
What is liquidity?
The liquidity of an asset is the ease with which the asset can be converted to cash without a substantial loss in value.
Photo by vox_efx, courtesy of flickr
The ”without a substantial loss in value” part is the part that is often forgotten. Any asset will sell if the price is low enough, but for a business, selling off assets for next to nothing is not conducive to staying in business.
Businesses list their assets on the balance sheet in order of liquidity.
Starting with cash, the balance sheet makes its way down through accounts receivable, inventory, and other current assets before listing fixed assets such as property, plant and equipment.
Follow the lead of the businesses and create your own balance sheet. The balance sheet will track all of your assets and you can research the market for each asset to determine how liquid or illiquid they may be.
In case of an emergency, it’s good to know which assets can be converted to cash quickly, without a huge loss. Emergencies aside, creating a balance sheet will help you keep track of your assets and help you arrive at your net worth.
For more information on asset liquidity visit Miranda Marquit’s article, Fixed vs. Liquid Assets, on allbusiness.com.
