A balance sheet is provided as an example for calculating a company’s financial position by measuring its liquidity, paying its current debt with its current assets. The information reflects two years of data for a hypothetical company.
The balance sheet data will also be used to calculate the current ratio, quick ratio, and networking capital, as well as provide an explanation of each as well as the meaning of changes from year to year. The results can be replicated for your firm or one that you are interested in investing in.
What is Liquidity?
If you’re running a small or medium business, one of the theories in bookkeeping that you’re going to want to wrap your head around as timely as possible is liquidity. Liquidity is a measure of your business’s aptitude to cover its immediate and short-term debts and responsibilities. Put a different way; it’s a method of labeling how well you can shield your current liabilities using your current possessions.
Computing your company’s liquidity, which you can do by computing and tracing different ratios of your business’s properties and liabilities, will be fundamental in ensuring that your corporation is in good financial shape. It can also help you spot possible money problems before they evolve too far and help you secure loans from creditors.
Why is SME liquidity important?
A company needs financial freedom of action. This means you must be able to pay your bills. If you cannot pay, you’re insolvent, also called bankrupt. To avoid this state, which often spells the end of a company and remains solvent to pay your bills, liquid funds are necessary.
Even if you grow economically, solvent companies are endangered. It may be that your customers will always pay their bills. But it’s a fact that some people wait until the last moment to do it, until the very due date. Anyone not having the luxury to delay their payments, but obliged to pay immediately, will have a liquidity problem if their available funds are insufficient.
Why Does it Matter to SME’s?
We’ve already seen that good liquidity—as demonstrated by healthy liquidity ratios—can help your business secure the credit it needs. But taking a close look at your company’s liquidity over time can also allow you to make smart internal decisions about your business’ finances.
By comparing your current and quick ratios month-over-month and year-over-year and making comparisons to your competitors’ ratios, you increase the likelihood of spotting financial snags before they pop up or start to snowball. That way, you can make more informed decisions on company spending and determine whether or not you’ll need to liquidate any assets to cover short-term debts.
What is a good liquidity ratio?
In general, if your liquidity ratio is greater than 1, you’re doing well. There is no gold standard for a healthy liquidity ratio as it varies from market to market. It would be unreasonable to expect a construction company’s liquidity ratio to be the same as a stock broker’s.
If a company’s ratio starts climbing to a number much greater than one, that is called a liquidity surplus. Too many assets and not enough spending has a negative effect on the market. However, if the ratio is less than one, it could spell bankruptcy for the company as it indicates a struggle to pay off debts. Let’s look at some examples in the tech industry.
Liquidity and liquidity risk in smaller organizations is a critical problem. It is considered one of the biggest aspects of holding back the world’s economy. It would be valuable for every business to make liquidity and liquidity risk a top priority.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.