Knowledge clip, liquidity
Liquidity
Liquidity is the extent to which a company is capable of meeting its short-term payment obligations.
So, in other words are you capable of paying the obligations on the short-term?
To who is it important that a company can meet its short-term obligations. For example, suppliers of
all kinds of goods as food and beverages.
They want their money within for example 30 days, so on the short term!
Liquidity ratios
Current ratio
Current assets / current liabilities
Ideally the current ratio should be 2:1 (€2 in assets to every €1 of current liability.). You want more
current assets than current liabilities. If this goes below 1:1 then you might have a serious problem if
a supplier want his money!
Acid test ratio (quick ratio)
Current assets excluding inventories/ current liabilities
Ideally the acid test ratio should be 1:1, because there are nog inventories and therefore the risk is
lower.
The current ratio and acid test ratio tell us how many times our current assets can pay our current
liabilities. For this you can look on the balance sheet and see if you can pay the current liabilities with
the current assets.
Furthermore, the current ratio also accounts of stock, however if stock takes some time to sell then
to get a better picture this should also be removed and then u should use the acid test ratio. So, if
you have stock that is for a longer term in the business it gives another picture you are not able of
changing your stock into money you could have problems with the liquidity.
Liquidity
Liquidity is the extent to which a company is capable of meeting its short-term payment obligations.
So, in other words are you capable of paying the obligations on the short-term?
To who is it important that a company can meet its short-term obligations. For example, suppliers of
all kinds of goods as food and beverages.
They want their money within for example 30 days, so on the short term!
Liquidity ratios
Current ratio
Current assets / current liabilities
Ideally the current ratio should be 2:1 (€2 in assets to every €1 of current liability.). You want more
current assets than current liabilities. If this goes below 1:1 then you might have a serious problem if
a supplier want his money!
Acid test ratio (quick ratio)
Current assets excluding inventories/ current liabilities
Ideally the acid test ratio should be 1:1, because there are nog inventories and therefore the risk is
lower.
The current ratio and acid test ratio tell us how many times our current assets can pay our current
liabilities. For this you can look on the balance sheet and see if you can pay the current liabilities with
the current assets.
Furthermore, the current ratio also accounts of stock, however if stock takes some time to sell then
to get a better picture this should also be removed and then u should use the acid test ratio. So, if
you have stock that is for a longer term in the business it gives another picture you are not able of
changing your stock into money you could have problems with the liquidity.
