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Knowing how to calculate the liquidity ratio is essential to understanding your business’s financial health. It shows whether your company can meet its short-term obligations. This is especially true if you’re dealing with many customers or rely heavily on timely payments.
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The liquidity meaning refers to your business’s ability to meet its short-term liabilities. Think of payments to suppliers, salaries, or taxes. Liquidity offers a clear view of whether you have enough available funds to pay your bills on time.
Understanding how to calculate liquidity ratio helps you avoid financial difficulties. With a clear picture of your liquidity position, you can take timely action—such as speeding up collections or reducing costs. It also supports smarter decision-making regarding growth, investment, or financing.
There are two commonly used liquidity ratios:
Current ratio = (current assets + cash equivalents) / short-term liabilities
Quick ratio = (current assets – inventories + cash equivalents) / short-term liabilities
The current ratio includes inventory in its calculation, while the quick ratio excludes it. This matters because inventory may not easily convert to cash.
A current ratio between 1.5 and 2 is typically seen as healthy. A quick ratio of 1 or above is also considered good. These figures indicate you have enough liquidity to meet your obligations—even without including inventory. The ideal benchmark varies by industry.
Payt gives you the tools to stay in control of your liquidity. Our software helps you:
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Liquidity refers to your ability to meet short-term financial obligations, while solvency focuses on the long-term balance between equity and total assets.
Cash flow tracks the actual movement of money in and out of your business. Liquidity is a snapshot of how much you have available at any moment.
Negative liquidity means you don’t have enough resources to pay your short-term liabilities. This can lead to payment delays or even insolvency if not addressed.
