It is probably the best known and most often used of the liquidity ratios. Analysts and investors use it to evaluate the business’s ability to pay its short-term debt obligations. These include accounts payable (payments to suppliers) and taxes and wages. It compares all of a company’s current assets to its current liabilities. It’s usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less.
A measure of liquidity. This measure compares the totals of the current assets and current liabilities. The higher the ratio, the greater the ‘cushion’ between current obligations and the business’s ability to pay them.
A ratio of 2.00 or more is an indicator of good short-term financial strength. In other words, the current assets of the business should be at least double the current liabilities.
Current Ratio = Current Assets / Current Liabilities
A ratio of 2.00 is a good financial position for a business, meaning that it can meet its short-term debt obligations with no stress. If the ratio is less than 1.00, then the business would have a problem covering its monthly bills. A higher ratio is typically better with regard to maintaining liquidity.
It goes without saying you need to keep your current ratio above 2. It’s not always that easy, but maintaining something close through carefully managing your current liabilities is a key action to help you not just survive but thrive.
I encourage you to create a report or a dashboard that gives you all your figures whenever you need them. If you don’t have the time or resources to make that happen then sign up for Blue Bean today and you’ll see your metrics within a few minutes.
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