Quick assets are the most liquid assets being controlled by a company. They are cash or their value can be quickly exchanged into cash in a relatively short period of time (usually shorter than a year) without significant loss of their value or no loss whatsoever. This group of assets is essential for maintaining liquidity and solvency of a company.
For healthy operations most companies keep a proper amount of quick assets in form of cash, cash equivalents and marketable securities to maintain adequate cash flow and finance their immediate operations or investments.
Quick assets components
Quick assets are made up of:
- Cash - funds readily available in bank accounts and interest-bearing accounts, for example: paper money in register, checks, money deposits, cash in banks, etc.
Marketable securities - these are financial instruments that can be easily traded on open markets with quoted prices and there is a substantial amount of buyers ready to make a purchase, for instance: common or preferred stocks of another company.
- Accounts receivable - collectible only (uncollectible and stale receivables should not be included in quick assets), goods or services that have been provided to customers but have not yet been paid for.
Prepaid expenses and taxes - expenses for services being spent in current account period but not yet received, for example: insurance, rent expense.
- Short-term investments - that means investments which are expected to be converted into cash within a year. These are usually stocks or bonds which can be liquidated easily and quickly.
Qick assets calculated
In a simpler and more comprehensible form:
So, to quickly calculate value of quick assets one needs just a value of current assets and inventory, which can be found in balance sheet of the company.
The reason for excluding inventory from quick assets is that it takes longer time to sell them and exchange them to cash - so they do not possess the essential quality that defines quick assets. Also, some industries that work on long-term contracts have long-term receivables but they are usually included in quick assets, though they should be excluded from calculation of quick asset value, due to their low liquidity.
Application in company evaluation - quick ratio
Main use of quick assets value is to determine the liquidity of the company in short term, that is to gauge the ability of the company to finance its immediate operations or pay its bills and short-term debt (liabilities) .
Quick ratio is a financial formula which divides the sum of quick assets by its current liabilities.
It is used to determine company's ability to pay its short-term liabilities and obligations in case of a sudden drop in revenue (for example because of a bad market situation). Investors and financial experts use this ratio to assess liquidity of a company in comparison to other enterprises in the same branch or to verify if a company maintains proper business operations .
The optimal value of quick ratio is considered to be 1, though it may vary between different branches, and it means that a company is capable of financing its current liabilities. What is more, comparing values of quick ratio over time may help investors track changes in company's performance. A value much bigger than 1 may imply that the company may not be making use of its resources in an effective way and value much lower than 1 may mean that the company is illiquid or may face liquidity problems in near term, which can lead to solvency issues (paying for long-term obligations).
Alternative name for quick ratio
The other name for quick ratio is acid-test ratio. The name comes from an ancient chemical test being used to detect whether mined metal is gold or base metal. Gold is a noble metal and is resistant to corrosion and acids. If metal dissolves due to reaction with acid, it is not gold. Hence the name for detecting company's proper operations.
Examples of Quick assets
- Cash: Cash is the most obvious type of quick asset and is the most liquid. It is the most liquid asset because it can be used to immediately pay liabilities or purchase assets.
- Marketable Securities: Marketable securities are short-term investments that can be easily converted into cash. Examples of marketable securities include treasury bills, commercial paper, and certificates of deposit.
- Accounts Receivable: Accounts receivable are short-term debts owed to the company by its customers. They are considered quick assets because they can be collected in a relatively short period of time.
- Inventory: Inventory is another type of quick asset. Examples of inventory include raw materials, work-in-process, and finished goods. Inventory can be sold quickly to generate cash.
- Prepaid Expenses: Prepaid expenses are expenses that have been paid in advance but are not yet consumed. Examples of prepaid expenses include rent, insurance, and taxes. These expenses can be easily converted into cash.
Advantages of Quick assets
Quick assets offer a number of advantages to companies. These include:
- Availability of funds: Quick assets provide a company with liquid funds that can be used to finance day-to-day operations, pay off short-term debts, and purchase inventory.
- Low risk: Quick assets are usually low risk investments since they are easily converted to cash and can be sold quickly if needed.
- Liquidity: Quick assets provide quick liquidity to a company which helps to meet short-term financial obligations.
- Flexibility: Quick assets are versatile and can be used for a variety of purposes. They can be used to finance investments or used as collateral for loans.
Limitations of Quick assets
Quick assets have many limitations that need to be taken into account when attempting to use them. These include:
- Limited investment opportunities: Quick assets are typically held in cash which offers limited opportunities for investment, leaving businesses unable to capitalize on gains from more lucrative investments.
- Lower return on investment: Quick assets are typically low-yield investments with little potential for capital gains.
- High transaction costs: Quick assets are often subject to high transaction costs, such as brokerage fees and market spreads, which can reduce the amount of cash available to the business.
- Risk of loss: Quick assets are often exposed to currency exchange risks and other market-related risks, which can reduce the value of the asset.
- Difficulty in predicting future cash flows: Quick assets are often difficult to predict and may not provide the necessary liquidity when needed.
- Lack of access to capital: Quick assets may not provide the necessary access to capital needed by businesses to finance operations or to invest in new opportunities.
The other approaches related to Quick assets include:
- Short-term investing: This includes investing in short-term instruments, such as money market funds, certificates of deposit, and Treasury bills, which are liquid and can be converted into cash in a relatively short period of time.
- Managing accounts receivables: This involves ensuring that customers pay their invoices in a timely manner and that the company is collecting the money due to them.
- Selling non-essential assets: This involves selling any non-essential assets, such as real estate or other investments, in order to generate cash.
- Negotiating better terms with creditors: This involves negotiating with creditors to reduce the amount of debt owed or to extend the repayment period in order to reduce the amount of interest paid.
In summary, Quick assets are the most liquid assets a company holds and can be used to maintain liquidity and solvency. Other approaches include short-term investing, managing accounts receivables, selling non-essential assets, and negotiating better terms with creditors.
|Quick assets — recommended articles|
|Cash and cash equivalents — Core Deposits — Non current liability — Assets funding strategy — Evergreen Loan — Held to maturity securities — Current portion of long-term debt — Lombard loan — Collateral management|
- Ang, A., (2013) Illiquid Asset Investing, Columbia Business School Research Paper, BlackRock, Inc 13(2)
- Costea, C. D. (2009) The liquidity ratios and their significance in the financial equilibrium of the firms, The Annals of The "Ştefan cel Mare" University Suceava. Fascicle of The Faculty of Economics and Public Administration, Volume 9, No.1(9),
- Michalski, G., (2014) Factoring and the Firm Value, Facta Universitatis Series: Economics and Organization, 5(1) p. 31-38
- Noor, A., & Lodhi, S., (2015) Impact of Liquidity Ratio on Profitability: An Empirical Study of Automobile Sector in Karachi,; International Journal of Scientific and Research Publications, 5(11)
- Yu, Q., Miche, Y., Séverin, E., & Lendasse, A. (2014). Bankruptcy prediction using extreme learning machine and financial expertise. Neurocomputing, 128, 296-302.
- Michalski, G., (2014) p.31-38
- Noor, A., & Lodhi, S., (2015)
- Costea, C. D. (2009)
- Ang, A., (2013)
Author: Klaudia Trybuła