Calculating Liquidity Ratios

October 5, 2017 Finance, Resources Comments (0) 68

Liquidity Ratios measure the amount of liquidity the business has to cover its debt and provides a high-level overview of financial health.

These ratios include:

CURRENT RATIO (Also known as the Working Capital Ratio)

The Current Ratio measures the company’s ability to generate cash to meet short-term financial commitments. The formula is as follows:

Current Ratio =Current/Current Liabilities

The current ratio serves as an early warning sign of the business possible cash flow issues for investors and lenders.

 

QUICK RATIO (Also known as the “Acid Test”)

The Quick Ratio measures the businesses ability to access cash quickly for immediate demands. The formula is as follows:

Quick Ratio = Current Assets – Inventories/Current Liabilities

A ratio of 1.0 or greater is acceptable, but it is industry dependent. Generally speaking, investors prefer a higher quick ratio.

While these formulas are straightforward, I have created a spreadsheet calculator for readers to use an explore. If you’re interested, you can download the Liquidity Ratio Calculator using the button below. If you would like to learn more about Financial Ratios and how they may be used, read the post, Financial Ratio Analysis and the Entrepreneur.

 

 

 

A few notes on this calculator:

  • This calculator is an example and is for use as is. It is not supported in any way. It is not intended to be a tool to use without customization based on the specifics of an entrepreneurial venture and its unique financial statements.
  • This calculator is only an example to give the reader an idea of how such a tool can be developed. The numbers within are not based on a real business. I compiled this as an offshoot of work in a graduate class, but I have created developed similar models for entrepreneurial ventures. Each business venture is different, and so is the ratios used and considered for that enterprise.
  • Financial Ratio calculations are done annually using actual numbers. This model can be used in that way. It can also be used to calculate and review ratios monthly. Monthly numbers would allow the reader to track improvements over time.
  • All of the “Bold Blue” text areas can be changed to demonstrate how the interactivity might work. No other data can be changed.
  • Formulas can be seen in each of the cells (mouse over it), but only the values in the “Bold Blue” text area can be changed.
  • By downloading you acknowledge this is for personal use only. It is not to be sold or distributed in any way.

 

Reference

Rogers, S. (2014). Entrepreneurial Finance: Finance and Business Strategies for the Serious Entrepreneur. New York: McGraw Hill Education.

David Harkins is a serial entrepreneur, which is a more professional way of saying he is still trying to figure out what he wants to be when he grows up.
When not working for himself, he has had a fulfilling career in marketing, advising both large and small companies including several in the Fortune 500 and many of America’s largest nonprofit organizations. In his spare time, he consults, speaks, writes, hikes, explores, and creates art. Although, not necessarily in that order. Connect with him on social media below:

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Calculating Liquidity Ratios

by David Harkins time to read: 2 min
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