Liquidity Ratios

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

How effectively is the investment in working capital being used to generate sales?

LOWER is better.

How efficiently is working capital being used to generate sales?

HIGHER is better

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

• How much liquid assets do we have available to pay CL?
• Close to Current Ratio.

How many days of inventory do we have on hand? How much cash is tied up in inventory?

LOWER is better

How many times did we sell our average inventory balance?

HIGHER is better.

How many days does it take us to collect from our customers?

LOWER is better

How many times did we sell and collect our average receivables balance?

HIGHER is better

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.

How long did we hold only our cash before we pay it out to our suppliers?

HIGHER is better.

How large is our receivables balance compared to our payables?

LOWER is better

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