Liquidity Ratio

Current Ratio: Current assets/Current Liabilities

(A measure of how much larger the assets are to the liabilities – bigger is better)

  • Current Assets: All liquidity (cash, inventory etc)
  • Current Liabilities: All debts owed to other parties (staff, suppliers, customers, government etc..)

Quick Ratio: (Cash + Accounts Receivable)/Liabilities

(A belt and braces ratio that ensure the enterprise has sufficient ready and near ready cash to meet its current liabilities)

  • Cash: All free monies in business accounts
  • Accounts Receivable: Debts owed by customers to the enterpise

Ave Collection Period: (Accounts receivable at month end/ave net daily sales for same period)

(Otherwise known as Average Creditor Days.  It indicates the rate at which the clients/customers pay their bills)

  • Accounts Receivable: Debts owed by customers to the enterpise

Ave Payment Period: (Accounts payable at month end/ave daily purchases for same period)

(Otherwise known as Average Creditor Days.  It indicates if some parts of working capital are being used effectively)

  • Accounts Payable: Debts owed by the enterpise to other parties (A.K.A Liabilities)

Days Stock Held: (Cost of Sales/ave inventory for same period)

(Tis indicates how quickly the inventory is sold and replaced with new inventory – higher is better)

  • Cost of Sales: Raw materials and direct labour costs
  • Ave Inventory: (Start inventory+ End inventory)/2

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