Liquidity Ratios

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  1. Net Working Capital
    How much money do we have tied up in our daily operations?

    CA = Cash, AR, Inventory

    CL = AP, Accrued Expenses

    • LOWER is better unless you have a large rainy day cash fund. We don’t want too much tied up in our
    • daily operations
  2. Working Capital to Sales
    How effectively is the investment in working capital being used to generate sales?

    LOWER is better.
  3. Working Capital Turnover
    How efficiently is working capital being used to generate sales?

    HIGHER is better
  4. Current Ratio
    Do we have the right amount invested in working capital?

    • We need it to be about 1:1. If it is much lower we may not be able
    • to pay our liabilities as they become due. If it is much higher we may have too much invested in our
    • day to day operations.

    Close to 1:1
  5. Quick Ratio
    • How much liquid assets do we have available to pay CL?
    • Close to Current Ratio.
  6. Day's Supply of Inventory
    How many days of inventory do we have on hand? How much cash is tied up in inventory?

    LOWER is better
  7. Inventory Turnover
    How many times did we sell our average inventory balance?

    HIGHER is better.
  8. Day's Recievable Outstanding
    How many days does it take us to collect from our customers?

    LOWER is better
  9. Recievables Turnover
    How many times did we sell and collect our average receivables balance?

    HIGHER is better
  10. Bad Debt Percentage (Percent Uncollectible)
    What percentage of our receivables will we not be able to collect? How reliable are our customers?

    • Remember that Gross Receivables =
    • Net Receivables + Allowance

    LOWER is better.
  11. Days' Payables Outstanding
    How long did we hold only our cash before we pay it out to our suppliers?

    HIGHER is better.
  12. Accounts Recievable to Accounts Payable
    How large is our receivables balance compared to our payables?

    LOWER is better
  13. Cash Conversion Cycle
    How many days does it take to turn an investment in WC into cash? Puts all three areas of our working capital (cash flow) management together.

    LOWER is better
Card Set:
Liquidity Ratios
2011-11-11 13:27:49

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