Liquidity is a measure of the company's ability to meet obligations as they come due. A greater liquidity means that a company is in a healthier position to repay its liabilities/debts. In the liquidity section of your performance report, you will find five measurements:
- Current Ratio= Total Current Assets / Total Current Liabilities: Generally, this metric measures the overall liquidity position of a company. It is certainly not a perfect barometer, but it is a good one. Watch for big decreases in this number over time. Make sure the accounts listed in "current assets" are collectible. The higher the ratio, the more liquid the company is.
- Quick Ratio= (Cash + Accounts Receivable) / Total Current Liabilities: also measures your company’s liquidity like the current ratio, but the quick ratio does not include your inventory. The greater the value, the better.
- Inventory Days= (Inventory / COGS) * 365: If this measurement is applicable to your company and is included, it will reveal how much inventory (expressed in days) you have on hand. It can tell you how quickly your company can respond to market and/or product changes. The lower, the better.
- Accounts Receivable Days= (Accounts Payable / COGS) * 365: This number reflects the average length of time between credit sales and payment receipts. It is crucial to maintaining positive liquidity. The lower the better.
- Accounts Payable Days= (Accounts Payable / COGS) * 365: This ratio shows the average number of days that lapse between the purchase of material and labor, and payment for them. It is a rough measure of how timely a company is in meeting payment obligations. Lower is normally better. This value tells you the average number of days that lapse between your company’s purchase of labor and materials and your company’s payment for them. The lower, the better, generally.
**COGS= Cost Of Goods Sold
In each of the five primary sections of your performance review, WeDoBooks bundles a collection of tips that managers can consider to improve each section’s overall score and boost the strength and profitability of your business.