Why is a share not a liquid asset
Liquid funds - what are liquid funds?
Liquid funds include funds that are available for immediate payment. These primarily include cash, bank balances, and checks.
Sufficient liquid funds are important for every entrepreneur. Find out here how you can get your costs under control with liquidity planning.
Liquid funds refer to the assets of a company that are immediately available for payment. They form an item in the current assets on the assets side of the balance sheet.
Liquid funds and their components
Liquid funds contain the "liquid" - i.e. liquid - components of the assets. According to the definition in the Commercial Code, liquid assets include the following assets:
- Cash on hand
- Bundesbank balances
- Bank balances
This definition of liquid funds includes that part of the assets that can be used directly to pay off liabilities.
How much liquid funds are necessary?
The amount of liquid funds required depends on the business activities of the respective company.
The basic rule with regard to liquid funds is: as low as possible but as high as necessary. This means: A company must have sufficient liquid funds to be able to settle its current expenses - otherwise there is a risk of insolvency, i.e. bankruptcy.
On the other hand, too high a proportion of liquid funds lying idle in the bank is counterproductive, as it hardly generates any interest and can often be used more effectively in other places.
Every company must therefore find a good balance of liquid funds.
Ranking of liquid funds
Liquid funds are valued according to their liquidity (i.e. the degree to which they can be converted into cash).
1st order liquid funds
First-order liquid funds include all cash and cash equivalents that are already available, as well as bank balances.
2nd order liquid funds
The second-order liquid funds are all items that can be quickly converted into cash, e.g. checks, bills of exchange, securities and trade accounts receivable (FLL).
3rd order liquid funds
Third-order liquid funds can only be converted into cash with relatively great effort, e.g. goods, raw materials, auxiliary materials or supplies.
Definition of liquidity: calculation of liquid funds
In order to calculate the availability and the proportion of a company's liquid funds (liquidity), two calculation methods can be used:
1st degree liquidity
With liquidity of 1 degree, it is calculated whether a company can settle its current debts with the liquid assets from the bank, cash register, checks and bills of exchange. So it is about the ability to settle short-term liabilities (payment term: less than 1 year).
A company should aim to achieve first-degree liquidity of 10% to 30%.
2nd degree liquidity
The 2 degree liquidity defines the liquid funds a little further, and also counts short-term receivables (payment term: less than 1 year) to the liquid funds, since these are also quickly available.
The aim is to achieve 2nd degree liquidity of 100% to 120%.
Cash flow statement and cash
In the cash flow statement (also called cash flow statement), the company shows the development of its liquid funds.
It is usually derived from the net income for the year, which is adjusted for elements that are not relevant to cash flow.
These elements include, for example, depreciation, as well as endowments or the release of provisions.
The cash flow statement is a compulsory part of consolidated financial statements, i.e. the annual financial statements of really large companies.
- Is Italy still a rich country?
- Dedicated girls hold back their friends
- Should I shave my beard or not
- What do Russians think of Albanians
- What sport requires the least physical skills
- Why do BPD patients run away
- How do colleges weigh high school GPAs
- How do I install a stair handrail
- Helps a doctorate career
- What are the benefits of studying psychology
- Why do smokers have dark lips
- Can my twin feel how I keep moving
- What are examples of government institutions
- How old was Mary, the mother of Jesus
- All Chinese names are words
- How do I interview developers
- What does the Portuguese word Arguido mean
- Where is NSH Hyderabad located
- Can an accused president remain popular?
- Who has the best cleaning franchise investment
- Which Java reporting tool is better
- What strange things excite you
- What's so good about Indian food
- What is a Company Debt Rescheduling 1
- How does a kiwi eat
- Can a Muslim eat Christmas dinner
- Replaces automation skilled workers
- Which temporary jobs pay off the most?
- Why is blood pressure low after exercise
- Where can I learn QA online 2
- You should smell your own fragrance
- Which American president has the lowest IQ?
- Guard dogs make really good pets