What are Liquid Assets?

You cannot pay your developers with office furniture.

This is the harsh reality that many first-time founders encounter when they look at their balance sheet. You might see a high net worth or significant retained earnings. However, if that value is locked up in things you cannot spend immediately, your business is at risk.

This brings us to liquid assets.

In the simplest terms, a liquid asset is an asset that can be easily, securely, and quickly exchanged for legal tender. It is money you can use right now.

Liquidity refers to how quickly an asset can be converted into cash without losing significant value. Cash itself is the most liquid asset. It requires no conversion.

For a startup, liquid assets usually fall into a few specific buckets:

• Cash on hand: Physical currency or money in a checking account.
• Money market accounts: Accounts that pay interest but allow for quick withdrawal.
• Marketable securities: Stocks or bonds that can be sold on a public exchange almost instantly.

If you have to wait weeks to find a buyer or if you have to lower the price drastically to sell the item quickly, it is not a liquid asset.

To understand liquidity, you have to look at its opposite. Illiquid assets are valuable items that take time to sell.

Examples include:

• Real estate
• Company vehicles
• Heavy machinery
• Intellectual property

  

• Private equity shares

Inventory sits somewhere in the middle. While you intend to sell it, you cannot guarantee it will turn into cash tomorrow. If you are forced to liquidate inventory to make payroll, you often have to sell it at a loss. Therefore, inventory is generally considered less liquid than securities.

Founders often make the mistake of reinvesting all their cash into illiquid assets too early. They buy a building or expensive equipment to reduce tax liability. While this builds asset value, it removes the flexibility needed to navigate a bad quarter.

In a startup environment, liquid assets represent your runway.

Runway is the amount of time you have before you run out of money, assuming your current income and expenses stay the same. If you have $100,000 in the bank and you burn $10,000 a month, you have ten months of runway.

If you take that $100,000 and buy a piece of specialized machinery, your assets on paper remain the same. You are still worth $100,000.

However, your liquid assets are now zero.

You cannot pay the electric bill with a machine. You are now insolvent.

The goal is not to keep 100% of your value in cash. Cash sitting in a checking account loses value to inflation. It is not working for you.

The challenge is finding the balance.

You need enough liquid assets to cover your short-term liabilities and unforeseen emergencies. This is often called working capital.

Ask yourself these questions:

• If revenue stops tomorrow, how many payroll cycles can we meet?
• Are our assets locked in long-term investments that carry penalties for early withdrawal?
• Do we have a line of credit that acts as a liquidity buffer?

Keep your eyes on what is convertible. Profit looks good on a statement, but cash keeps the lights on.