The liquidity of a company relates to the available resources to meet current payment obligations in the short term. If liquidity is not in order, it can lead to financial problems. For example, if debtors pay invoices late or not at all, and your organization therefore lacks the resources to immediately meet short-term debts.
How do you calculate liquidity?
There is a formula available for calculating liquidity, which distinguishes between current ratio and quick ratio:
Current ratio = current assets + cash / short-term liabilities
Quick ratio = current assets – inventory + cash / short-term liabilities
In the current ratio, inventory is included in the calculation. In the quick ratio, inventory is excluded from the calculation. For example, a supermarket sells more products faster than a kitchen supplier and therefore includes inventory in calculating liquidity, as with the current ratio.
When is your company liquid?
A company is considered liquid when there are resources available in the short term to meet short-term debts. This includes paying outstanding invoices, as well as paying interest on a short-term loan and tax obligations.
What is good liquidity?
It depends on the company when liquidity is considered good. Generally, a current ratio of 1.5 to 2 is considered good liquidity. However, this is highly dependent on the type of company. For example, a shoemaker needs fewer resources to meet short-term payment obligations than an insurer. For the quick ratio, a liquidity ratio of 1 or more is considered good. Ensure a healthy financial situation by improving liquidity.
