Over the last 12 months we have been helping some of our clients understand their liquidity ratio.
It’s an important ratio as it helps to monitor the ability of your business to pay back short-term debt. The higher the liquidity the better the position your company will be in.
Therefore, a liquidity ratio of “1” means that your company can just meet all its current debts recorded on the balance sheet. But it also means there won’t be any money left over.
A liquidity ratio of 2.0 and above means the company has capacity to meet its current debts comfortably.
Watching the trend in your company will give you an indication if cashflow is flowing well in your business.
You also make like to look at our other article on thsi topic talking about working capital
Liquidity Ratio should be monitor monthly!
Its true to say many businesses have had a liquidity boost this year due to the Government support during a tough time. Some businesses managed to boost their liquidity during this time. The next six months will be critical to monitor to make sure that your business survives the post covid environment.
Contact Geoff on 9597 9966 if you would like to understand your businesses liquidity ratio and how you too can make cash the king in your business.