Liquid Assets Accounting, LLC
1011 E Main, Ste 453 (253) 604-0396 or 1-888-876-9394
Puyallup, WA 98372 Fax (253) 604-0398
Website: liquidassetsaccounting.com Email: liqbooks@aol.com
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What is a Current Ratio?
What does it mean? Why would you, as a majority value of your current assets in Cash?
business owner, be concerned about your Accounts Receivables? Or Inventory?
company’s Current Ratio?
As the current ratio approaches or falls below 1,
A Current Ratio is much more that just one of you will want to take a close look at your
those fancy terms that your accountant or a business and make sure there aren’t any liquidity
financial “type” might talk about. It’s something issues. For instance, if you are in a
that can easily be computed, but can tell you a manufacturing business and your current assets
number of things about your business. Banks, are made up, in large part, by inventory, this
Investors and even creditors use it to tell how could over-inflate your assets, or if your assets
“liquid” you business is – how easily your are mainly raw materials, this cannot easily be
business will be able to pay off the current debt. converted into cash.
It can also point to possible problems that you
may not even know exists. On the opposite side of the spectrum, if the
current ration is 3 or 4, then you may have
A Current Ratio is a comparison of your current potential funds that could be used to expand your
assets (what you have like your Cash, Accounts business.
Receivable and Inventory) to your current
liabilities (what you owe). The term current is Another way to analyze your business through
used to describe the easy conversion of cash to the current ratio is to look at the ratio over a
relieve your incurred debt within a 12-month period of time, such as annually. This will allow
period. This is also referred to as your you to compare the ratios, which could signal
“liquidity” factor (or how liquid your business growth or potential “concerns” you may not be
is). aware of. Compare the ratios from year to year.
Again look at what makes up the ratio (assets
To compute your Current Ratio, you would and liabilities) and determine why the ratio has
divide your current assets by your current changed. A declining ratio could signal some
liabilities. For example, if a business reports potential financial problems, like not enough
$10,000 in current assets and $5,000 in current assets to cover your debts. An improving ratio
liabilities, the current ratio would be 2:1 could signal a brighter financial picture, as long
(10,000/5,000 = 2). Although ratios may vary as the reason it’s improving is an increase in
from industry to industry a ratio of 2:1 is your assets along with a reasonable amount of
considered the norm. In other words, your assets debt. Look at your inventory. Has your
are twice what your liabilities are. inventory increased without incurring additional
debt? This would mean that perhaps you’ve
Ok, so your curiosity got the best of you. You elected to use your cash to fund your growth, as
grabbed your most recent balance sheet and opposed to using the leverage of OPM (Other
calculated your Current Ratio. But now what? People’s Money).
As you see it, it’s just a number. But let’s
explore this a little more.. For a deeper analysis of your current ratio and
other financial tools, or if you need financial
Since your current ratio is dictated in part by statements generated or updated, please give us a
your current assets, you will want to determine call.
what makes up your current assets. Is the
