What is liquidity? Functions of money. Money liquidity What is illiquidity of money

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Many ordinary citizens have heard about the term “liquidity” more than once, but cannot say what this concept reflects. According to experts, liquidity is one of the most complex economic terms that is used to describe financial condition companies. It is important to note that there are several various types liquidity, each of which has its own characteristics. In this article we will try to answer the question of what liquidity is, in simple words avoiding complex economic terms.

Liquidity is a characteristic of an enterprise’s assets, which can determine the possibility of their full implementation at market value

What is liquidity: a simple explanation

In the economic sphere, liquidity is the transformation of assets recorded on the balance sheet of an enterprise into financial resources through their sale. It is very important that the sale price of the assets is close to their fair market value. Based on the foregoing, we can conclude that the degree of liquidity is a reflection of the time period necessary for the sale of the property assets of the enterprise.

It is important to note that this term can be used not only in relation to assets, but also to the company itself.

Today, there are three main types of liquidity, differing in the speed of transformation into cash:

1. Highly liquid assets– this category includes securities, financial assets and deposits in financial institutions. Such assets can be converted into monetary resources in a relatively short period of time.
2. Assets with medium liquidity– this group includes accounts receivable minus short-term investments. In addition, medium-liquid assets are considered to be products that go through the preparatory stage prior to sale. These assets can be converted into cash within a period ranging from thirty days to six months. What should be highlighted here is the fact that the sale price of such assets is almost equal to their real market value.
3. Assets with low liquidity– this group includes real estate that is obsolete production equipment and overdue accounts receivable. You can also include other assets in this category, the sale of which will require a fairly long period of time.

Based on the above, we can conclude that the same asset may have different liquidity. When calculating this indicator, it is necessary to take into account many various factors, including the prestige of the company itself. As an example, let's take a situation related to the sale of Apple shares. These shares are sold out in the shortest possible time period, due to the popularity of the company. Little-known manufacturers that produce similar products sell off their shares over a longer period of time, which leads to a loss of their market value.

Importance of the indicator

Having dealt with the question of what liquidity shows, we should talk about the areas of application of this analytical tool. As a rule, this instrument is actively used in investment activities. The main task of every investor is to make a profit that significantly exceeds the amount of invested capital. However, it is not always possible to achieve such a result. Market changes, falling consumer demand and other circumstances may cause the loss of your investment. In order to prevent the development of such a situation, the investor needs to sell existing assets in order to invest the returned money in a new project.

An example is the real estate market. Let's imagine an entrepreneur who owns several inexpensive apartments and a couple of cottages in elite villages. In case of financial crisis, selling apartments will not be particularly difficult due to the relatively low cost of the asset compared to an elite cottage. From all of the above we can conclude that this type real estate has a higher degree of liquidity.

Calculation formulas

Carrying out economic analysis in order to identify the level of financial stability is an integral part of business activity. Liquidity of an enterprise is the speed of covering debt obligations through the sale of property assets and the attraction of third-party resources. Determining this value allows you to identify the level of solvency of a particular organization.

Coverage ratio

This ratio is often referred to as the degree of absolute liquidity and reflects the company’s ability to cover debt obligations of a fixed-term nature. According to experts, this indicator is used as the main parameter in assessing financial activities. In order to determine the current ratio, it is necessary to divide the value of all assets used in circulation by the total amount of debt obligations. Such calculations are made on the basis of accounting documents.

To determine the value of the coefficient under consideration, the formula is used: “Current assets / Current debt”. The average value of this indicator is a coefficient varying from 1.5 to 2.5. Identification of an indicator whose size is less than one unit indicates possible difficulties in closing current loans. An increased ratio indicates inappropriate use of assets.

Quick liquidity ratio

This economic tool allows you to determine the organization’s ability to close all loans without resorting to reserve funds. As a rule, the need to prepare such calculations arises when difficulties arise in the sale of existing goods.

To determine the amount of quick liquidity, the formula is used: “( Current assets- Reserves) / Existing liabilities.” An indicator whose value is less than one indicates that the company being evaluated has significant financial difficulties. If this circumstance is identified, the company needs to sell off existing assets or turn to third-party investors.

Absolute liquidity ratio

Absolute liquidity ratio – is a reflection of the cash ratio cash and non-cash resources to current debt of an urgent nature. Speaking in simple language, this analytical tool allows you to obtain information about the speed of loan repayment.

It is important to note that in practical conditions this tool is used extremely rarely. The reason for the low demand for this indicator is due to the fact that the bulk of financial resources are invested in business development. It should also be noted that when drawing up a contract for obtaining a loan, the parties agree in advance on the timing of payments. As a rule, the need for such calculations arises when interacting with banking organizations. According to established standards, a coefficient of 0.2 is the standard for the indicator under consideration.

Liquid assets of the enterprise

The liquidity of money is the highest, which makes this asset of paramount importance. However, it should be understood that there are factors that can affect the degree of liquidity of this asset. One such example is the active level of securities dumping by European countries, which leads to a fall in the dollar exchange rate.

Second place goes to securities issued government agencies. The liquidity of this asset is closely related to the total number of contracts where this asset is used as the object of the contract. According to experts, securities used by world exchanges have higher liquidity compared to other assets.

The third place in this list is occupied by precious stones and metals. It is important to note that the movement of these assets is regulated at the legislative level. However, this factor does not prevent exchanges from using these assets as an object for concluding various transactions. The value of such assets is set by world trade centers. The main advantage precious metals is the possibility of rapid implementation. Such transactions have minimal risk, and the assets themselves practically do not lose their original value.

The level of liquidity of an asset is directly proportional to the risk of loss of funds. Based on this economic rule, we can conclude that real estate and securities of a long-term nature have the lowest liquidity. This factor is explained by the fact that any changes in market demand can lead to a significant loss of capital due to the long period of time required to sell the property.

Bank liquidity

Bank liquidity can be characterized as the level of opportunity credit organization cover the debt to its investors. In simple terms, this parameter reflects the ability of a financial institution to pay clients interest on deposits. In addition to funds to repay debt, a banking institution must have additional resources to conduct its own activities.

There are four types of bank liquidity, differing in the maturity of obligations:

1. Instant payments.
2. Short-term debt.
3. Medium-term liabilities.
4. Long-term agreements.

In addition to the above factors, it is necessary to take into account such a parameter as the source of collateral. Purchasing liquidity is created on the basis of funds received from the Central Bank. Accumulated liquidity is a combination of monetary resources located in the internal fund of a banking organization and assets that can be transformed into cash in a short period of time.

Based on the above, we can conclude that the liquidity of a banking organization depends not only on external, but also internal factors. The latter include the property values ​​of the credit institution, the size of the internal fund and the amount of available capital. In addition, the level of independence of the banking organization should be taken into account. Availability large quantity assets that are the property of the bank are the key to financial stability. However, such an analysis must take into account both the state of the economy and government policies.

Conclusions (+ video)

Balance sheet liquidity is one of the important indicators that reflects the ratio of assets and liabilities of an enterprise. In simple terms, this economic instrument allows you to determine the amount of money received through the sale of property assets, which will be used to pay off existing debt. This parameter is one of the most important criteria for assessing the financial independence of each business entity.

As you know, not every product can be quickly sold without losing its price. Some goods sell quickly - there is a steady supply and demand for them, they are talked about - hot goods. And some will have to be sold for a long time, and this cannot be done without discounts. The ability of a product to be quickly sold at a price close to the market price is denoted by the economic term liquidity. This term is not used often in everyday life, but you may well hear it on radio and TV, or see it in the news or articles published in the press or on Internet sites. What this term means, where it is used, and in what cases it can be very important - we will understand in this article in as simple words as possible.

What is liquidity in simple words?

In economic theory, there is not one, but several definitions of liquidity. We will look at what it is in simple words, using only the most basic examples. Most often, liquidity is understood as the ability to as soon as possible sell the asset at the market price.

An asset can be any tangible or intangible value. In the financial and business spheres, these include securities, cash deposits, real estate, enterprises, products, etc.

Liquidity (translated from Latin liquidus – liquid, flowing) is economic term, indicating the ability of assets (values) to be quickly sold at a price close to the market. In other words, this is the ability of a product to be quickly converted into money.

Money, as a universal means of payment, has the greatest liquidity.

Another meaning of the term liquidity is the ability commercial organization, the state or any person to be liable for their financial obligations. This ability is influenced by many factors, including the economic situation in the country and the world, market conditions, the total value of the enterprise’s assets, etc.

For example, a bank will be liquid when, in the case of active lending to individuals and legal entities, he will have enough reserves to fulfill obligations to return funds on deposits. And the liquidity of the state is determined by its ability to timely repay debt to other countries, international organizations or banks.

Types of liquidity

There are 3 types of liquidity:

• high;
• average;
• low.

High liquidity refers to those assets that can most easily be sold on the market. These include bank deposits and securities. In relation to enterprises and states, those that easily fulfill their financial obligations and make all payments on time are considered highly liquid.

Low liquid assets are real estate, enterprises and commercial products. While stocks can be sold in just a few minutes, selling a house can take weeks or months. In this case, the situation may be such that the property will have to be sold at a noticeable discount (discount). Illiquid organizations are those that are unable to repay accumulated debts; the total value of their assets is lower than the existing debt.

The intermediate group includes, for example, metals, including precious ones. Selling them is usually not difficult, but it is not always possible to get a fair price for them.

But this classification is simplified and generalized. In fact, within each group of assets there are highly liquid instruments and illiquid ones. For example, among the shares there are so-called “blue chips”: Sberbank, Aeroflot, Gazprom, Lukoil, etc. These are the shares of the most successful companies, the demand for which is very high.

On the other hand, there are a lot of so-called “junk” securities on the market. These are stocks or bonds that offer no value to investors, making them difficult to sell. The discount on them can reach 30-50%, and the implementation period can be calculated in weeks.

The situation is similar in the real estate market. Finding a buyer for luxury housing is very difficult; it may take many months or the price will have to be significantly reduced (this is low-market housing). At the same time, a modest one-room apartment can be sold in a matter of weeks. Therefore, such an asset in this group can be considered quite highly liquid.

Why is it important to conduct liquidity analysis?

Liquidity ratio is considered very important in economics. Its analysis allows you to assess the current state of the company, the value of its assets and the ability to fulfill its financial obligations. Liquidity is used by investors to assess the prospects of investing in a particular asset.

The greatest value is, of course, highly liquid assets. They allow the investor to quickly respond to changes in the market and quickly transfer one financial instrument to another. That is why there is always a good demand for inexpensive housing in the real estate market. And in the foreign exchange market, investors prefer to invest in the US dollar or euro, but avoid more exotic monetary units.

Also, a competent investor carefully analyzes the stock market, giving preference to those securities that can later be easily sold. Mistakes and risky actions can cost big money. By choosing low-liquidity shares, an investor may find himself in a situation where no one will need them, even at a deep discount. And in the event of a sharp fall in the prices of these shares, he will have to record large losses.

When it comes to businesses, liquidity management has become an important task in any company. To tasks financial analysts includes:

• taking into account the company's financial resources when determining the order of payment of bills;
• avoiding cash gaps;
• determining the minimum account balance that will allow successful transactions the next day.

Competently organized work in the company ensures clear interaction between various structural divisions, which allows you to effectively use financial resources and avoid problems with payments. In such a company, management has a complete understanding of the financial situation, controls all financial flows and can predict the state of the enterprise for the short and medium term. And in analyzing the situation, liquidity plays an important role.

Liquidity

Absolute liquidity

Absolute liquidity ratio(English) Cash ratio) - financial ratio equal to the ratio of cash and short-term financial investments to short-term liabilities (current liabilities). The source of data is the company’s balance sheet in the same way as for current liquidity, but only cash and cash equivalents are taken into account as assets: (line 260 + line 250) / (line 690-650 - 640).

It is believed that the normal value of the coefficient should be at least 0.2, i.e. every day 20% of urgent obligations can potentially be paid. It shows how much of the short-term debt the company can pay off in the near future.

Market liquidity

The market is considered highly liquid, if purchase and sale transactions for goods traded on this market are regularly concluded on it in sufficient quantities and the difference in the prices of applications for purchase (demand price) and sale (offer price) is small. Each individual transaction in such a market is usually not capable of having a significant impact on the price of the product.

Liquidity of securities

Liquidity stock market usually assessed by the number of transactions made (trading volume) and the size of the spread - the difference between the maximum prices of buy orders and the minimum prices of sell orders (they can be seen in the order book of the trading terminal). The more transactions and the smaller the difference, the greater the liquidity.

There are two basic principles for making transactions:

• quotation- placing your own orders for purchase or sale indicating the desired price.
• market- placing orders for instant execution at current bid or offer prices (satisfying quoted bids with the best current price)

Quotation bids are formed instant liquidity market, allowing other trading participants to buy or sell a certain amount of an asset at any time. The question will be the price at which the transaction can be carried out. The more quotation bids are placed on a traded asset, the higher its instant liquidity.

Market orders form trading liquidity market, allowing other trading participants to buy or sell a certain amount of an asset at a desired price. The question will be when the transaction will take place. The more market orders there are for an instrument, the higher its trading liquidity.

See also

Notes

Literature

• Brigham Y., Erhardt M. Analysis of financial statements // Financial management= Financial management. Theory and Practice / Transl. from English under. ed. Ph.D. E. A. Dorofeeva.. - 10th ed. - St. Petersburg. : Peter, 2007. - pp. 121-122. - 960 s. - ISBN 5-94723-537-4

Categories:

• Financial ratios
• Financial analysis
• Economic terms
• Money circulation
• Investments
• Exchanges
• Corporate governance

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See what “Liquidity” is in other dictionaries:

LIQUIDITY Financial Dictionary

LIQUIDITY- (liquidity) The degree to which the assets of an organization are liquid (See: liquid assets), which allows it to pay its debts on time, as well as to take advantage of new investment opportunities. Finance. Explanatory ... ... Financial Dictionary

liquidity- 1. The ability of assets to be converted into cash. It is measured using coefficients. 2. A measure of the relationship between cash or easily marketable assets and the enterprise’s need for these funds to pay off due... ... Technical Translator's Guide

LIQUIDITY- (liquidity) 1. The property of assets that can be easily and quickly converted into money at an easily predictable price. In addition to the money itself and deposits in non-bank financial firms such as building societies, short-term securities such as... ... Economic dictionary

LIQUIDITY- LIQUIDITY, liquidity, many others. no, female (fin. trade neol.). distracted noun to liquid. Liquidity of goods. Liquidity of liabilities. Ushakov's explanatory dictionary. D.N. Ushakov. 1935 1940 ... Ushakov's Explanatory Dictionary

Liquidity- Liquidity – 1. In a general sense, the ability of assets to be sold on the market: quickly and without high costs (high L.) or slowly, at high costs (low L.). Cash has absolute liquidity. Other assets... ... Economic-mathematical dictionary

Liquidity- (liquidity) The degree to which the assets of an organization are liquid (see: liquid assets), which allows it to pay its debts on time, as well as to take advantage of new investment opportunities. Business. Intelligent ... ... Dictionary of business terms

Question “What is enterprise liquidity” most often asked in the context, but below the question is discussed in a broader sense.
The market economy dictates its terms. Any entrepreneur wants to deal only with those companies that are able to pay off all their obligations within the agreed time frame. Therefore, it is so important to understand what indicators of the financial condition of an enterprise exist and what they mean. One of these indicators is liquidity, or the ability of a particular enterprise to quickly convert existing current assets into money in order to pay off all creditors.

Definition of liquidity

Liquidity is the ability of material resources to quickly turn into money at a value as close as possible to the market value.

Money in the economy has the most important feature - it is completely liquid, i.e. they can be used at any time as a means of payment. Roughly speaking, a liquid material resource is one that can be quickly converted into money.
The concept of liquidity can be applied to an enterprise, banks, securities, assets and liabilities. Depending on the time it takes to convert an asset into cash, there are several types of liquidity:

Let's understand what liquidity is on real example : shares of a well-known gas company on the market can be sold in a couple of seconds, the difference in value compared to the purchase price will not be noticeable at all - only a couple of hundredths of a percent. And the shares little-known company either they will be sold much longer, or as a result they will lose over 10% of their market value.

Who needs liquidity and why?

This is an important economic factor that potential investors first pay attention to when choosing a particular company to invest their capital in. This will allow him to invest funds as efficiently as possible, and if the option turns out to be a failure, he will always be able to promptly convert the company’s assets back into money. People who are far from the investment process are interested in liquidity in order to understand which is the most reliable bank to give preference to.

The liquidity of an enterprise is analyzed in order to assess its real financial position in the short and medium term.

What does it mean? Based on the balance sheet (namely, the forecasted operating results) and the profit and loss statement, the specialist receives information about the company’s availability of at the moment sufficient amount working capital to pay off all obligations.

Liquidity, profitability and solvency: debriefing

Understanding what is liquidity, many people confuse it with solvency, believing that these concepts are identical. This is not entirely true. To determine liquidity, special ratios are used that show whether there are enough working capital to pay off short-term obligations (even with small delays in payments).
The concept of solvency also means the presence of a sufficient amount of money or assets to pay off obligations, both short-term and long-term obligations. Solve is called an enterprise that has no overdue debts to creditors and has sufficient cash in its current account.

Conclusion: liquidity is the company’s potential ability to pay off short-term obligations, solvency is the real ability to fulfill obligations to creditors.

We cannot ignore profitability, which serves as another indicator economic efficiency and is also related to liquidity. Profitability can be achieved even with low liquidity.

For example, a small, newly established company providing mover services has two used cars and a small staff. The company received a loan for development. Liquidity in this case is low; after the sale of property, there will hardly be enough money to cover the debt. But the form can get a large daily revenue, so the business pays off and is profitable. Conversely, with low revenue, even an enterprise with great liquidity may soon go bankrupt.

Liquidity analysis. How and why to carry it out?

Thanks to liquidity analysis, you can judge the financial stability of the company, how it “keeps afloat” and clearly see whether it will be able to meet its obligations after the sale of existing assets and liabilities. Therefore, it is so important to analyze the financial condition of the enterprise.
This information is used by different external users:

• Suppliers of raw materials for the company are most interested in the indicator of absolute liquidity (what is the current total value of the company's assets that can be used to solve the problem of current debts);
• For banks issuing a loan to an enterprise, it is important to know the intermediate liquidity ratio (the ratio of highly liquid assets to short-term obligations or liabilities);
• Investors and buyers of company shares are interested in financial stability, determined by the parameter of current or urgent liquidity (its ability to repay debts if difficulties suddenly arise with the process of selling products).

The main sign of good liquidity- this is an excess current assets enterprise over its short-term liabilities.