Quick assets are a notable financial metric that play an important role in evaluating a company's short-term financial health. In this comprehensive guide, we will dive deep into the world of quick assets, highlighting their importance, types, practical applications, and other details.
What are quick assets
As the name indicates, quick assets are either already available as cash or can be easily converted into cash. They serve as the foundation of an organisation's liquidity and provide the safety net required to cover unforeseen expenses. Marketable securities, accounts receivable, and cash and equivalents are the three main categories of quick assets. These resources are of utmost significance in the field of financial analysis since they are essential in the computation of critical financial ratios like the quick ratio.
Key takeaways
- In the balance sheet analysis, current and quick assets are pivotal categories that provide information about a company's liquidity.
- Quick assets are assets with high liquidity, such as cash and equivalents, marketable securities, and accounts receivable.
- A crucial indicator of a company's immediate capacity to pay off its existing debts without turning to external financing or inventory liquidation is the quick ratio, which is generated from quick assets.
The basics of quick assets
Quick assets, in contrast to other asset classes, have high liquidity, making it possible to convert them into cash quickly without suffering a large loss in value. Marketable securities, accounts receivable, and cash and cash equivalents make up the bulk of quick assets. Interestingly, while inventories take longer to turn into cash than other assets, they are excluded from quick assets.
Organisations carefully distribute a part of their short-term assets into marketable securities and cash to act as a safety net in case of sudden demands for funding, investments, or operations. The quick asset composition of a business might change based on its operating dynamics and industry. Retail businesses that serve individual customers may have little exposure to accounts receivable, but companies that serve corporate clients may have significant amounts in this area.
List of quick assets for a business
Quick assets are essential for guaranteeing a firm's financial flexibility, particularly when it comes to fulfilling urgent commitments. Here are a few of them:
- Cash: Cash is the actual money that a business has on hand or in its bank accounts and is easily available for regular business operations.
- Marketable securities: These are financial instruments, such as stocks or bonds with short maturities, that are easily convertible into cash in a short amount of time.
- Accounts receivable: These show the amount of money that clients owe the business for products or services that have previously been delivered and point to potential future cash inflows.
- Short-term investments: Because they may be easily liquidated, investments having maturities of less than a year, like money market funds or Treasury bills, are referred to as quick assets.
- Deposits in banks: Funds kept in checking, savings, or money market accounts are readily available to meet daily expenses.
- Marketable receivables: Accounts receivable that may be sold to third parties for quick cash to increase liquidity are known as marketable receivables.
Classification of quick assets
This is how quick assets are classified:
Cash and equivalents:
This consists of hard currency and cash equivalents kept in bank accounts that are easily and unrestrictedly accessible. Treasury bills and short-term deposits are examples of low-risk assets that are easily convertible into cash. These are known as cash equivalents.
Accounts receivable:
Customers' outstanding payments to the business are represented by accounts receivable. Long-term or dubious receivables are not included in the category of quick assets; only those that are anticipated to be recovered quickly are.
Marketable securities:
Securities that are easily exchanged for cash on the market are known as marketable securities. Short-term mutual funds, equities, and bonds are a few examples. They offer instant liquidity without being restricted by time.
Short-term investments:
Investments having short maturities, usually less than a year, are classified as short-term investments. When necessary, they may be quickly converted into cash, giving the business's operations more liquidity.
Example of quick assets: The quick ratio
The quick ratio, sometimes known as the "acid test," is a crucial tool in financial research that brings quick assets to light. Quick ratio provides information on how well a firm can use its most liquid assets to meet short-term obligations. It is calculated by dividing the total of marketable securities, cash and equivalents, and accounts receivable by the actual liabilities.
Quick ratio = (Cash & equivalents + Marketable securities + Accounts receivable) / Current liabilities
Alternatively, the quick ratio may also be expressed as:
Quick ratio = (Current assets - Inventory - Prepaid expenses) / Current liabilities
When sales slow down or cash payments are delayed, the quick ratio is a reliable indicator for analysts and investors to determine a company's liquidity resilience.
Quick assets vs. Current assets
Quick assets present a more stringent assessment of a company's liquidity compared to current assets. Quick assets provide a cautious assessment of a company's short-term financial situation since they do not include inventories or other less liquid assets. This emphasis on the assets with the highest liquidity helps determine a company's capacity to pay short-term debts.
In comparison to the current ratio, which takes inventory into account, the quick ratio provides a more stringent assessment of liquidity. The quick ratio focuses on the short-term liquidity cushion that is available to cover upcoming liabilities, while the current ratio gives a more comprehensive view of a company's liquidity.
