Category 1: Liquidity Ratios
Liquidity ratios are the most commonly used business ratios. These ratios are sometimes called working capital ratios because they measure the liquidity in the business. Banks and lending institutions often use them when they are evaluating loan applications and they may also be of interest to your creditors because it shows the ability of your business to meet your bills when they are due.
Liquidity ratios are comprised of 4 types:
- Current ratio
- Quick asset ratio
- Working capital
- Debtor turnover ratio
1. Current Ratio:
The current ratio is one of the best-known measures of financial strength. It answers the following question: "Does my business have enough current assets to meet my current debts, allowing for a margin of safety?" A generally accepted current ratio is 2:1. The best acceptable ratio obviously is when you have 1:1. This is usually playing it too close for comfort.
If you find that your current ratio is too low you can improve it by:
- Paying some debts off.
- Increasing your current as...
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