Liquidity is a qualitative indicator that characterizes the solvency of an enterprise or an individual borrower, the turnover of assets, and more specifically, the ability of goods and services to be sold at the price declared on the market without the condition of providing discounts within a minimum time frame. There are several options for the liquidity ratio that are used for economic analysis. Consider options for liquidity ratios in the analysis of the financial condition of the enterprise.
One way to analyze your financial health and to determine how it can be improved is to carefully examine your financial ratios. Ratios are used to compare different aspects of a company's performance or how a company fits into a particular industry or region. They reveal very basic information, such as whether you have accumulated too much debt, accumulated too much inventory, or not collecting receivables fast enough.
A common use of financial ratios is for the lender to determine the stability and health of your business by looking at your balance sheet. The balance sheet is a portrait of what your company owns or owes, and what it owes. Bankers often make financial ratios part of your business loan agreement. For example, you may have to keep your equity above a certain percentage of your debt, or your current assets above a certain percentage of your current liabilities.
But the odds should not be assessed only by visiting your banker. Ideally, you should review your ratios on a monthly basis to keep your company moving. Although there are different terms for different ratios, they fall into 4 main categories.
These measures determine the amount of liquidity you must cover with your debts and provide a broad overview of your financial health. The Quick Ratio measures your ability to quickly access cash to support urgent claims. Also known as the acid test, the quick ratio divides current assets by current liabilities. In general, a ratio of 0 or more is acceptable, but this may vary depending on your industry.
The results of calculations of liquidity ratios are necessary for investors to adequately assess the solvency of the enterprise. The enterprise itself calculates them to control its own activities.
A relatively low ratio could mean that your company may find it difficult to meet its obligations and may not be able to take advantage of opportunities that require quick cash. Paying off your obligations can improve this ratio; you may want to delay purchases or consider long-term borrowing to pay off short-term debt.
But what constitutes a healthy ratio varies from industry to industry. For example, in a clothing store, there will be items that quickly lose value due to changing fashion trends. However, these goods are easily liquidated and have a high turnover. As a result, small amounts of money are constantly coming in and out, and in the worst case, liquidation is relatively easy.