Short-term liquidity

This chapter reviews short-term liquidity measures:

  • Current and quick ratio
  • Working capital to sales
  • Working capital days

Short-term liquidity measures

The first test of a company’s financial position is, ‘Will it have sufficient cash over the immediate future to meet its short-term liabilities as they fall due?’ Unless the answer here is positive, the company is in a financial crisis irrespective of its profit performance.

Normally short-term liabilities amount to a considerable part of the total borrowings of the company. They are always greater than the company’s physical cash resources. The question we ask is, ‘Where will the cash come from to pay them?’

Cash is in constant movement through the company. It flows ...

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