Liquidity Ratio

• Does the organisation have enough money to pay the bills? Can it cover debts in the short term?
• Current Ratio:

  Current Assets/ Current Liabilities x 100
• Current Ratio:

  Purpose:

  To measure whether the business has sufficient current payments in full of current liabilities. The ideal is 2:1.
• Current Ratio:

  How to improve it:

  • Sale of unnecessary assets.
  • Chase up trade receivables - faster payment/access to cash assets.
  • Pay off any current liabilities.
  • Avoid overspending/cut costs of cash purchases.
  • Offer discounts to attract prompt payment/early payment.
• Acid Test Ratio:

  Current Assets - Inventory/ Current Liabilities x 100
• Acid Test Ratio:

  Purpose:

  To measure if the company has sufficient liquid assets to cover current liabilities. The ideal is 1:1.
• Acid Test Ratio:

  How to improve it:

  • Using an efficient inventory control system.
  • Sale of unnecessary assets.
  • Offer discounts to attract prompt payment/early payment.
  • Avoid overspending/cut costs of cash purchases.