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Understanding how you calculate liquidity ratios is key to assessing the financial stability of your business. It helps you determine whether your company can meet its short-term financial commitments. Especially if you handle a high volume of customers or rely heavily on timely payments, maintaining a strong liquidity position is vital.
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The definition of liquidity ratio is the extent to which your business can settle its short-term liabilities. This includes paying suppliers, wages, or taxes. Liquidity gives you clear insight into whether your available funds can cover your bills on time.
Learning how to calculate liquidity ratios allows you to anticipate financial difficulties. It gives you a solid grasp of your liquidity position, enabling timely actions such as speeding up collections or reducing costs. It also supports smarter decisions related to growth, investment, or financing.
There are two widely-used liquidity ratio formulas:
Current ratio = (current assets + cash equivalents) / short-term liabilities
Quick ratio = (current assets – inventories + cash equivalents) / short-term liabilities
The current ratio includes stock value, while the quick ratio excludes it. This matters if your inventory isn’t easily converted into cash.
A current ratio between 1.5 and 2 is usually considered healthy. For the quick ratio, a value of 1 or above is good. These figures suggest your business can meet its obligations, even without factoring in inventory. The ideal benchmark varies by industry.
Payt equips you with everything you need to take control of your liquidity. Our software supports you by:
Curious to know what Payt can do for you? Download our brochure below.
Liquidity concerns your ability to cover short-term commitments. Solvency looks at the ratio between equity and total assets, indicating long-term financial strength.
Cash flow reflects the actual movement of money in and out of your business. Liquidity is a snapshot of how much money is available at any given time.
Negative liquidity means you don’t have enough resources to cover short-term debts. If left unresolved, this may result in payment issues or insolvency.
