Monitoring cash flow and liquidity

Cash flow and liquidity ratios let you assess the amount of working capital you have in your business, and how solvent the business is in the short to medium term.

Working capital ratio

The working capital ratio is also known as the 'current ratio', and is one of the best known measures of financial strength. It shows how much money you have available to meet creditors' demands.

You can use this ratio to establish whether your business has enough current assets to pay its current debts, with a margin of safety for unforeseen losses, such as reduced stock levels or hard-to-collect debts.

Use the following interactive calculator to help you work out your working capital ratio. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your working capital ratio.

Working capital ratio

Use this formula to calculate your working capital ratio.

Working capital ratio = current assets ÷ current liabilities

The higher the working capital ratio, the better. A ratio of 2 or higher, indicating you have twice as many assets as liabilities, suggests your business is in good shape. A working capital ratio of less than 1 indicates your business may be in trouble.

Quick assets ratio

Also known as the liquidity ratio, this measures the solvency of your business, or your ability to meet its immediate commitments. When calculating this ratio, it is important only to include current assets that are in cash or can be readily converted into cash. Only include current liabilities that may need to be met quickly.

You should aim for a ratio of 1:1 or higher. If the majority of your current assets are with debtors, and there is a pattern of debtors paying late, your quick assets ratio will need to be higher.

Use the following interactive calculator to help you work out your quick assets ratio. Once you have read and understood the example, you can type the numbers that are relevant to your business into the calculator to see your quick assets ratio.

Quick assets ratio

Use this formula to calculate your quick assets ratio.

Quick assets ratio = (current assets - stock) ÷ current liabilities

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