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Accounting Allah shmoop liquidity liquidity is such a big deal

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that balance sheets are organized around it Practically every finance

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course spends a ton of time focused only on how

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cash is managed and how companies actually pedantic Li pay

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their bills Maybe strangely this is actually a big problem

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for a ton of companies that don't plan or that

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live in it Pettitte of roller coaster environment where they

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can't pay their recurring fixed costs like rent or salaried

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union employees or tensions or insurance and then experienced times

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of huge demand Where then they have to spend a

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fortune on raw materials to build inventory to sell And

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yes companies can go bankrupt because demand for their product

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suddenly gets too high So the quality matters more than

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you might guess And because of this fact we actually

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tracked what isn't nailed down to the floor what's liquid

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or sellable or can quickly be turned into cash That's

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kind of what liquidity is Generally speaking an enormous thirty

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thousand square foot mansion in Idaho is not very liquid

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There just aren't that many buyers So what might take

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years for that thing to sell But a small home

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in Palo Alto is almost always liquid at the right

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price anyway and it's usually a big price as there

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always tons of buyers for a twenty eight hundred square

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foot ranch home on a quarter acre liquidity applies to

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stocks as well Microsoft shares trade in the tens of

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millions per day Other small cap companies have days were

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only a few thousand shares trade So if you own

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one hundred thousand shares of that small cap company and

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need to quickly get out who you'll pay a dear

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price as the stock craters on your selling volume trying

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to get liquid in a security that well eat So

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note how our balance sheet is laid out Cash comes

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first then accounts receivable than inventory than other like think

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pre paid rent then long term assets like a property

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plant equipment And then lastly it's the long term All

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right Do you think this order happened by accident Knew

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it did not Rose here are organized by liquidity I'ii

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most liquid First least liquid last Why well should the

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company have to be liquidated AII sold under duress While

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the easy to sell stuff is almost always the most

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liquid stuff right The values of the more liquid stuff

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our weight Haider or closer or less of a broad

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guess as to what they would actually bring in the

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open market place That is if a company has eighty

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three thousand two hundred thirty one dollars in cash in

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their Bank of America account well it's worth eighty three

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thousand two hundred thirty one dollars Not a lot of

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debate Not a lot of guesswork The left and the

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right agree on this one Go figure No worries about

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conflicts of interest either in selling that cash or transferring

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it It's just a wire in a clique But what

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about a fourteen year old tractor smelting plant or a

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twenty two year old newspaper printing plan Do they even

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print newspapers anymore They both still function But what are

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they worth Well the company paid ten million dollars for

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the printing plant twenty two years ago Is it still

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worth ten million Well prices have gone up over that

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time with inflation But printing plants are rare maybe for

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good reason because nobody wants them anymore But maybe the

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parts are worth a lot Or is this whole thing

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just scrap metal worth a ten or fifty or a

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hundred grand waiting to be hauled away at a price

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and then melted down Yeah very wide range Very hard

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to guess what that old printing plant is worth anyway

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You think about it Cash would be super easy To

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liquidate a liquid safe account receivable would be like a

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collecting three hundred grand from the NFL That dough that

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they already committed Teo paying You know if your lemonade

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services or advertising or whatever assuming the company performed on

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delivering that eliminate or service or ads or whatever i

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e supplying whatever that was promised and in order to

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show it as a receivable the service would have had

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to have been performed and delivered then collecting from the

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NFL While that should be very liquid it may take

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thirty days but it's a pretty clear and safe bet

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that it's going to happen The NFL at least still

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today has bang Okay so what about inventory How liquid

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is that Well this is harder to assess and to

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calculate like who's going to buy a million cops and

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five thousand pounds of semi used sugar or whatever amount

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you have on your books when you go bankrupt Yeah

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Tough to sell So the numbers here get vague really

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fast in the form of the value of which you

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are carrying that inventory at book value Or what price

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you paid for it versus what The market will actually

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pay you in cash to buy it that day Big

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spread Hence the focus on liquidity Because if you ever

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have to get liquid fast it can hurt a lot 00:04:41.201 --> [endTime] Yeah used cups anyone

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