How can a company quickly increase its liquidity ratio?

A:

A company’s liquidity ratio is a measurement of its ability to pay off all of its debts with its current assets. The ratio is calculated by taking the difference between liabilities and conditional reserves and using that figure to divide the company's total assets. The liquidity ratio is a valuable metric for market analysts and potential investors in helping determine if a company is stable and financially healthy enough to pay off the debts and outstanding liabilities it has incurred. A low liquidity ratio could signal the company is suffering financial trouble. However, a very high liquidity ratio isn't necessarily a good thing either; it may be an indication that the company is too focused on liquidity to the detriment of efficiently utilizing capital to grow and expand its business.

Two commonly reviewed liquidity ratios are the current ratio and the quick ratio. The current ratio examines the percentage of currently available assets a company has to meet its liabilities and provides a good indication of a company's ability to cover its short-term liabilities. It's a measure of cash on hand that a company has to settle expenses and short-term obligations. One way to improve its current ratio is by using sweep accounts that transfer funds into higher interest rate accounts when they're not needed and back to readily accessible accounts when necessary. Paying off liabilities also improves current ratio.

Another popular liquidity ratio is the quick ratio. This tool refines the current ratio, measuring the amount of the most liquid assets a company has to cover liabilities. The quick ratio excludes inventory and some other current assets from the calculation and is a more conservative measurement than the current ratio. The quick ratio can be improved using some of the same methods that improve the current ratio. Additional means of improving the quick ratio include using long-term financing rather than cash on hand to acquire inventory or selling unnecessary assets.

Liquidity is your company's ability to pay the bills as they come due. We've all heard the saying "Cash is king," so here are seven quick and easy ways to improve your company's liquidity.

1. Sweep accounts: Use sweep accounts through your financial institution. This will allow you to earn interest on any excess cash balances by "sweeping" or transferring the funds into an interest-bearing account when the funds aren't needed and sweeping them back to your operating account when you do need them.
2. Overhead: Assess your overhead costs and see if there are opportunities to decrease them. Lowering overhead has a direct impact on profitability. Overhead expenses, including rent, advertising, indirect labor and professional fees, are indirect expenses that you incur to operate the business outside of direct material and direct labor.
3. Unproductive assets: If you have unproductive assets that the business is just storing, then it's time to get rid of them. The only reason you should spend money on assets such as buildings, equipment and vehicles is to generate revenue.
4. Accounts receivable: Monitor accounts receivables effectively to ensure that you're billing your clients properly and that you're receiving prompt payments.
5. Accounts payable: Negotiate longer payment terms with your vendors whenever possible to keep your money longer.
6. Owner's draws: Monitor the amount of money that's being taken out of the business for non-business purposes such as owner's draws. Taking too much money out can put an unnecessary cash drain on the business.
7. Profitability: Review the profitability on your various products and services. Assess where prices can be increased on a regular basis to maintain or increase profitability. As your costs increase and markets change, prices may need to be adjusted as well.

Implement these seven easy tips in your business to improve your liquidity. It will help ensure you have the proper cash flow levels for continued operations and company growth. There are two main financial ratios used to measure a company's liquidity ratio.

1. Current ratio equals current assets divided by current liabilities. This should have a target ratio of 2 to 3, which indicates you have adequate liquid funds to pay your current obligations.
2. Quick ratio equals current assets (less inventory) divided by current liabilities. This should have a target ratio of 1 to 2, which indicates your liquid funds without selling your inventory.

You can find the balances of your current assets and current liabilities on your balance sheet. Visit with your accountant if you need further guidance and analysis. Looking at industry information also can help you assess how you compare to others in your specific industry.

> sell unwanted assets

>Reduce owner withdraws

>reduce the expenses like petty cash

> Make delay payments to vendors or negotiate for more credit period

liquidity ratio is the quick ratio. This tool refines the current ratio, measuring the amount of the most liquid assets a company has to cover liabilities. The quick ratio excludes inventory and some other current assets from the calculation and is a more conservative measurement than the current ratio. The quick ratio can be improved using some of the same methods that improve the current ratio. Additional means of improving the quick ratio include using long-term financing rather than cash on hand to acquire inventory or selling unnecessary assets.

A company can quickly increase its liquity ratio if it can increase its sales or by settling its trade payables or other current laibilities or by using cost cutting strategies so that expenses can be reduced to some extent.