2.3.2 Liquidity

• Liquidity in business finance refers to a company's ability to cover its short-term obligations as they become due.obligations
• Inadequate liquidity can lead to financial distress and damage a company's credit rating.
• Inadequate liquidity can result in late payments and penalties
• Match the liquidity ratio with its formula:

  Current Ratio ↔️ $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

  Quick Ratio ↔️ $\frac{\text{Current Assets - Inventory}}{\text{Current Liabilities}}$

  Cash Ratio ↔️ $\frac{\text{Cash + Marketable Securities}}{\text{Current Liabilities}}$
• Maintaining adequate liquidity is crucial for a company's operational stability and credit rating.
• The current ratio is calculated as \frac{\text{Current Assets}}{\text{Current Liabilities}}</latex>. A ratio of 2:1 indicates the company has twice as many assets as liabilities
• Liquidity ratios help analysts understand whether a company has enough liquid assets to cover its immediate liabilities.
• The current ratio measures the ability to cover current liabilities with current assets.
• A high current ratio indicates strong liquidity.
• What does the quick ratio measure?

  Ability to cover liabilities with quick assets
• The cash ratio measures the ability to cover current liabilities with cash and marketable securities.
• A low cash ratio may signal financial distress.
• Match the liquidity ratio with its formula:

  Current Ratio ↔️ $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

  Quick Ratio ↔️ $\frac{\text{Current Assets - Inventory}}{\text{Current Liabilities}}$

  Cash Ratio ↔️ $\frac{\text{Cash + Marketable Securities}}{\text{Current Liabilities}}$
• What does liquidity in business finance measure?

  Ability to cover short-term obligations
• Maintaining adequate liquidity ensures the company can pay its short-term debts on time.
• Adequate liquidity improves a company's creditworthiness.
• What are the three common liquidity ratios?

  Current Ratio, Quick Ratio, Cash Ratio
• A current ratio of 1.5 to 2 is generally considered healthy.
• What does a current ratio greater than 2:1 suggest?

  Strong short-term coverage
• A quick ratio greater than 1:1 indicates robust liquid assets.
• A cash ratio greater than 0.5:1 indicates immediate debt solvency.
• What are examples of external factors affecting liquidity?

  Market conditions and interest rates
• Internal factors affecting liquidity include operating cash flow and working capital management.
• Strategies for improving liquidity

  1️⃣ Enhance cash flow management

  2️⃣ Improve working capital efficiency

  3️⃣ Negotiate better terms with suppliers

  4️⃣ Secure lines of credit

  5️⃣ Divest non-core assets