Which characteristics define liquid funds

Liquid funds - what are liquid funds?

Liquid funds include funds that are available for immediate payment. These primarily include cash, bank balances, and checks.

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Liquid funds refer to the assets of a company that are immediately available for payment. They form an item in the current assets on the assets side of the balance sheet.

Liquid funds and their components

Liquid funds contain the "liquid" - i.e. liquid - components of the assets. According to the definition in the Commercial Code, liquid assets include the following assets:

  • Cash on hand
  • Bundesbank balances
  • Bank balances
  • checks

This definition of liquid funds includes that part of the assets that can be used directly to pay off liabilities.

How much liquid funds are necessary?

The amount of liquid funds required depends on the business activities of the respective company.

The basic rule with regard to liquid funds is: as low as possible but as high as necessary. This means: A company must have sufficient liquid funds to be able to settle its current expenses - otherwise there is a risk of insolvency, i.e. bankruptcy.

On the other hand, too high a proportion of liquid funds lying idle in the bank is counterproductive, as it hardly generates any interest and can often be used more effectively in other places.

Every company must therefore find a good balance of liquid funds.

Ranking of liquid funds

Liquid funds are valued according to their liquidity (i.e. the degree to which they can be converted into cash).

1st order liquid funds

First-order liquid funds include all cash and cash equivalents that are already available, as well as bank balances.

2nd order liquid funds

The second-order liquid funds are all items that can be quickly converted into cash, e.g. checks, bills of exchange, securities and trade accounts receivable (FLL).

3rd order liquid funds

Third-order liquid funds can only be converted into cash with relatively great effort, e.g. goods, raw materials, auxiliary materials or supplies.

Definition of liquidity: calculation of liquid funds

In order to calculate the availability and the proportion of a company's liquid funds (liquidity), two calculation methods can be used:

1st degree liquidity

With liquidity of 1 degree, it is calculated whether a company can settle its current debts with the liquid assets from the bank, cash register, checks and bills of exchange. So it is about the ability to settle short-term liabilities (payment term: less than 1 year).

A company should aim to achieve first-degree liquidity of 10% to 30%.

2nd degree liquidity

The 2 degree liquidity defines the liquid funds a little further, and also counts short-term receivables (payment term: less than 1 year) to the liquid funds, since these are also quickly available.

The aim is to achieve 2nd degree liquidity of 100% to 120%.

Cash flow statement and cash

In the cash flow statement (also called cash flow statement), the company shows the development of its liquid funds.

It is usually derived from the net income for the year, which is adjusted for elements that are not relevant to cash flow.

These elements include, for example, depreciation, as well as endowments or the release of provisions.

The cash flow statement is a compulsory part of consolidated financial statements, i.e. the annual financial statements of really large companies.