Liquidity Ratios

Liquidity ratios are probably the most commonly used of all the business ratios. Your creditors may often be particularly interested in these because they show the ability of your business to quickly generate the cash needed to pay your bills. This information should also be highly interesting to you, since the inability to meet your short-term debts would be a problem that deserves your immediate attention.

Liquidity ratios are sometimes called working capital ratios because that, in essence, is what they measure.

The liquidity ratios are:

• the current ratio
• the quick ratio

Liquidity ratios are commonly examined by banks when they are evaluating a loan application. Once you get the loan, your lender may also require that you continue to maintain a certain minimum ratio, as part of the loan agreement. For that reason, steps to improve your liquidity ratios are sometimes necessary.