One of the liquidity ratios used in business is the cash ratio. It is a much more effective tool for small business than the traditional current or quick ratio. Although the cash ratio is more difficult to manipulate in small business, most entrepreneurs miscalculate the result. This resource paper is designed to explain to the business entrepreneur the basic formula, how to properly apply the formula and educate the reader in calculating the ratio from financial reports of a small business. To fully grasp the cash ratio, it is encouraged the reader complete the prerequisites as follows:
* Business Ratios – Introduces the 21 ratios used in business by groups including the liquidity group of which the cash ratio is a member.
* Current Ratio – An all-encompassing liquidity ratio more appropriate to big business.
* Quick Ratio – A more refined liquidity ratio focusing on true short-term (30 days or less) ability to meet obligations.
The cash ratio is more appropriate in small business than the traditional
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