What are Quick Assets?
Definition: Quick assets are resources that can easily be liquidated or easily be converted into cash in less than a year or in the short-term.
Companies usually categorize their assets as either long-term assets or quick assets. Liquidity is the name of the game when it comes to quick assets because they can easily be disposed for cash consideration. In fact, this is the reason behind the name since they can be rapidly liquidated, unlike the long-term assets.
The high liquidity makes them quite useful to businesses, especially in situations where a business might be experiencing a cash crunch. In such cases, it can sell some of the quick assets in a short duration of time without a major loss of value for the firm.
Quick Assets Example
Some of the assets that are considered as quick assets include cash and cash equivalents, accounts receivables and marketable securities. The common characteristic about all of them is that they can easily be converted into cash and so they are considered as highly liquid. Inventories do not fall into this category because it takes some time to liquidate them.
How do companies use quick assets?
It is common practice for a firm to set aside some of its marketable securities and cash as collateral in the event that the company finds itself in a situation where it urgently needs finances. The liquidated cash can be used to fulfil some of the company’s urgent cash needs, to fund some of its operations and also for investment purposes where there are immediate investing opportunities. A company may decide to seek credit facilities to fund its monetary needs if it finds itself running low on quick assets.
The above explains why it is important for a firm to have safe levels of liquidity. We can simply compare it to an example where there are two individuals who suddenly find themselves in urgent need of cash. One has invested in furniture for their house while the other has invested in the stock market. The one that purchased furniture might find it hard to get the cash since they would first have to sell the furniture, which might prove challenging since getting customers is not easy. Meanwhile, the other individual simply has to offset some of his/her shares so that they can get the cash that they need urgently.
The above example demonstrates the importance of liquidity to a firm. The company might need cash for emergency situations such as repairing equipment or even securing an opportunity that just came up. Having a substantial amount of money invested in quick assets is thus a smart move for firms.
Quick Assets vs Quick Ratio
Quick assets are not only good for a company in terms of providing some monetary muscle, but they are also used to develop the quick ratio. The latter refers to a ratio that evaluates quick assets relative to short-term liabilities. In other words, it aims to give a picture of a firm’s ability to offset its short-term debt or liabilities. This ratio is also known as the acid ratio. The formula for calculating the quick ratio is shown below.
In this case,
C & E represents the cash and cash equivalents, MS represents market securities, and AR is the accounts receivables.
Alternatively, quick ratio can be calculated as;
Where CA represents current assets while PE represents the prepaid expenses.
Quick Assets vs Current Assets
Current assets are cannot be easily liquidated while in contrast, quick assets are highly liquid. Quick assets paint a picture of a firm’s liquidity and its ability to pay off short-term liabilities.
There is also a current ratio and thus the need to compare it to quick ratio. The current ratio evaluates a firm’s current assets, such as inventories when divided by the firm’s current liabilities. The quick ration provides a better liquidity test for a firm than the current ratio.