Liquidity is a means of understanding a company’s susceptibility to either current of future financial distress. It also helps build a risk profile of the business. But remember though that a single “safe” liquidity measure does not exist across all industries. Some industries traditionally and successfully trade at low liquidity levels, whereas for others, the same figure is a sign of distress.
How do you get your Quick Ratio? The Quick Ratio overcomes some of the issues with the Liquidity Ratio measure and only assesses those assets which have the potential to be liquidated quickly. This ratio does not include inventories as sales of inventory rarely achieve the value that may be on the books. A figure above 1 again is considered to be acceptable. However, the higher the value, the better.
What does it mean?
The ratio indicates how immediately liquid your business is excluding less liquid assets such as stock. For instance, if all of your creditors demanded payment at the same time, how much could realistically be raised immediately to pay them? Would this cover your liabilities? Check your liquidity with Jazoodle now.
How we derive your liquidity ratio?
Your company’s liquidity is calculated by comparing your total current assets (excluding stock / inventory) to total current liabilities. A current asset or liability is one that is expected to become due within the next 12 months.
How Can I Improve My Liquidity Ratio?
Your ratio can be improved by a number of measures or changes, including:
- Increasing cash balances.
- Increase sales revenues
- Reduce short term debt
- Pay off credit cards
- Implement a strong creditor and debtor payment policy