Cash assets are any economic resource that may readily be converted to cash. These assets often retain high levels of liquidity and may be used to ensure the financial ability of a company or individual to conduct daily operations. Cash assets are normally classified as current assets for accounting purposes, but differ slightly in definition. Current assets normally are expected to be converted to cash within one operating cycle, which is commonly one year. Cash assets, however, are unique to current assets in that they generally must be convertible to cash within three months or less.
Such assets may include treasury bills, money market funds, commercial papers and other assets that may be converted to cash easily. Any other financial investment or deposit which will mature in three months or less also qualifies as an asset. Assets that may be financially accounted for, but not considered liquid assets, include property, equipment and other investments with maturity terms greater than three months. Intangible assets, such as patents, trademarks and copyrights, are also not considered liquid assets.
Companies account for cash assets in an effort to help creditors, investors and other entities make decisions regarding the company. For example, a company that has applied to a creditor for capital funds to market a new product will be more likely to receive the funding if the company's balance sheet reflects a higher liquid asset ratio than other applicants'. The higher liquid asset ratio usually reflects a higher probability that the company will be able to pay debt. Accounting for a company's liquid assets also may enable management to determine the effects of daily decisions regarding the cash flow of the company, as the assets are reported on the company's balance sheet.
Cash assets may be calculated for an individual for much the same reasons as a company, though they are generally calculated on a smaller scale. Accounting an individual's assets may be done to determine the probability that he will pay a loan he might apply for. Assets can also be counted for personal reasons, such as a yearly review of one's financial portfolio. In some cases, the need to report these assets is for tax or debt purposes.
An individual's liquid assets may include her checking and savings accounts, stock bonds and short-term deposits. The criteria for determining a cash asset is typically the same as with companies: the asset must be easy to convert into cash within three months. Regional laws and methods of calculating these assets may vary. Most often, this form of financial auditing is done by a professional, who usually understands the local laws and accepted methods.
How To Protect Cash Assets
Like any other assets, cash assets are subject to seizure through legal actions. Here are a few ways to protect this type of portfolio allocation.
This type of insurance policy covers your cash assets in case your other policies max out. For example, you might be involved in an automobile accident and find yourself liable for $300,000 in medical bills and property damage. Your auto insurance policy might only cover $100,000, but the remaining $200,000 could be covered by your umbrella policy so your cash assets are safe from seizure by the court.
A trust is a legal instrument that places your assets into an account wherein a third party oversees the account maintenance and allocation. Trusts typically keep your assets safe from seizure resulting from court judgments, but they might be subject to child support payments. This kind of protection is usually irrevocable, so be sure it is the right choice for you.
This legal document prevents a partner in marriage from obtaining cash assets. With this type of protection, cash assets cannot be taken through alimony or other compensation should the marriage legally disintegrate. Although both persons might have negative feelings toward this legal instrument because it implies the possibility of divorce, it can be helpful to the property owner for the peace of mind it offers in case this event transpires.
Limited Liability Companies
If you run a business or have any ongoing activity involving income and expenses, opening an LLC can be beneficial. In case your business faces liability from a court judgment, only your company's assets are subject to the ruling. Your personal cash assets, on the other hand, are protected.
For many kinds of professionals, malpractice insurance is a necessity. Doctors and lawyers typically benefit from this kind of insurance if a client sues them for an alleged mistake or poor advice. For example, a doctor might miss part of a tumor while attempting to remove it through surgery, leading to the death of the patient. Without malpractice insurance, this doctor might owe millions in restitution. This policy will pay the amount owed so it does not come out of his or her personal cash assets.
Mediation is a good alternative to going to court because it gives some control to the person who allegedly committed the wrongdoing. For example, a restaurant owner might require employees to use mediation instead of suing if an injury happens on the job. With this strategy, the business owner can arbitrate a settlement outside of court so cash assets are not seized involuntarily.
What Are Examples of Cash Assets?
Cash assets include treasury notes and anything that can be converted to cash in three months or less. Here are a few examples.
Stocks are small amounts of ownership in a company. Regarding U.S.-based businesses, stocks can be publicly traded on the New York Stock Exchange or privately traded. These pieces of companies can easily be converted to cash with a single call to a stockbroker or the click of a button on a trading app.
Certificates of Deposit
A certificate of deposit is usually only considered a cash asset if the maturity date is under 90 days. Certificates with maturity dates over three months are not cash assets.
How Much of Your Assets Should Be in Cash?
Some financial advisors recommend keeping at least 5% of your assets in the form of cash. For real estate investors, advisors typically recommend keeping 20% of your portfolio as cash to ensure living expenses are covered during market downturns.