You may know that an asset is something of value that your business owns, but what does it mean to liquidate your assets? What are the different types of assets, and why would a business want them liquidated? 

This article explores:

  • What is a liquid asset?
  • What does liquidating your assets mean?
  • Why would a business liquidate its assets?
  • What other types of assets are there?
  • How can you monitor your cash flow?

What is a liquid asset?

Any cash, or cash equivalent assets your business owns are classed as liquid assets. This is because they are easily accessible, and can freely flow to wherever you need them to keep the business running. Any debts you are owed also count as an example of liquid assets.

What does liquidating your assets mean?

Cash is the most common liquid asset, because it can freely flow to wherever the business needs it. When you decide to liquidate your assets, you are selling those specific assets in exchange for cash (or cash equivalents). 

You can then use the cash to fund parts of your business, such as paying debts or buying new equipment. 

Typically, this refers to selling non-essential pieces of equipment, but in the event of insolvency, all assets may be sold in order to recoup and repay the debts owed.

Why would a business liquidate its assets?

Liquidating assets can fall into one of two categories; voluntary or forced. As a sole trader, forced liquidation isn’t something you’ll have to worry about. Since you’re directly responsible for your company’s finances, any business debts are yours to pay off — using either your personal funds or by selling your assets.

Voluntary asset liquidation

The main reason why a business would liquidate its assets is to improve its short-term cash flow. For example, if your business owes debts to a bank and isn’t able to pay, then you could sell (liquidate) your assets in order to pay those debts. 

You may also want to liquidate an asset if you’ve found it to be a bad investment. For instance, if you were under the impression that a piece of equipment would improve your business far more than it has, it may be best to sell it. 

Forced asset liquidation

If your business is registered as a separate entity (like a limited company) and cannot pay its debts, then the business can be declared insolvent. Once that happens, an insolvency practitioner may be appointed and force the business to liquidate its assets. The money raised by the sale of these assets goes directly to paying creditors.

What assets can you liquidate?

If your business owns an asset, you can liquidate it. Whether it’s a building, a vehicle, or regular inventory, you can sell it anytime your business needs a cash injection to keep the business running. 

When you are planning to sell off some of your assets, they should be things that will have the least impact on your business. For example, if your mobile food business owned its food truck, then selling it could significantly damage your business’ revenue. 

If you’re planning to liquidate your assets for a short-term cash injection, they need to be something you can sell quickly. For instance, a building or vehicle could generate a lot of capital, but the sale may take a while to go through. So instead, it may be better to sell off any raw materials or current inventory at a discounted rate. 

On the other hand, if an asset remains valuable but isn’t benefiting your business, you may want to take your time selling it. Waiting for a higher offer can help ensure you get a better price than if you sold it to the first interested party. 

What other types of assets are there?

There are several other different types of assets, and they’re broken down into several categories. These categories are based on how easy it is to liquidate the asset, and how useful they are in your daily operations. 

Current assets

Current assets are something that can be liquidated within a couple of weeks. Any stock or inventory could be considered current assets, if the business is able to sell them quickly and easily. 

Businesses that operate in a niche market may find it challenging to sell off their current inventory quickly. 

Fixed assets

Anything that is tied to the business and will take a while to sell is typically considered a fixed asset. Some examples of fixed assets include properties, machinery, or vehicles. You may find that your fixed assets have a daily and prolonged (over a year) use to your business. 

The best way to tell if an asset is fixed is by figuring out how long it would take to convert into cash. If it can’t be liquidated quickly (within a month), then it’s likely a fixed asset.

How can you monitor your cash flow?

Liquidating your assets isn’t always necessary, but if your finances aren’t clear then it can be difficult to know when it’s needed. Managing your finances yourself and running your business can be stressful and time-consuming when you’re self-employed. That’s why thousands of business owners use the Countingup app to make their financial admin easier. 

Start your three-month free trial today.

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