Liquidity ratios are a group of ratios used to measure the ability of a business operation to meets its current obligations. Liquidity ratios are similar to the initial medical tests a patient receives at a doctor’s visit. Doctors take blood pressure, temperature, and pulse rate. The doctor wants assurance that the primary indicators of health are good. Liquidity ratios are exactly the same. The user wants to know that the basic measurements of a business indicate good health today.
A section of the Liabilities and Equity side of the balance sheet. It refers to accounts payable, credit card debts, short term debts, and payroll compliance or taxes owed.
Insolvency refers to the ability to pay bills in a timely manner. It does not mean bankruptcy but long-term insolvency is a underlying factor of bankruptcy. Many owners and/or managers of small business have no idea of how to determine if the company is insolvent or headed towards the inability to meet their day to day obligations.
Employee benefits consist of vacation, sick time, retirement benefits, healthcare and other de minimis benefits. As a function of accrual accounting these benefits are estimated and posted as a deferred liability in the accrued payroll section of the current liabilities section of the balance sheet. This lesson explains how to calculate the respective benefits and post this information to the books.
To understand the cash situation, the cash flows statement is an additional report included in financial statements to basically convert the accrual basis balance sheet and income statement into a cash basis report. This way, management gets the best attributes of both accrual and cash basis accounting.
There is no single management style to address the multitude of working capital cycles existing in the various business sectors and the underlying industries. Taking raw resources and turning them into consumer goods has different time frames depending on the item produced. In addition, the sales period varies from product to product. Compare the production and sales cycle for an automobile to that of ice cream.
The current ratio is an inappropriate relationship to use or rely on in small business. The ratio is best suited for large publicly traded organizations. This article explains the basic formula for the current ratio, how to identify the ratio in reading financial statements, its purpose and the many drawbacks for its use with small business.
Cash disbursements is the process of remitting payment to vendors, suppliers and third party contractual obligations. Better managed offices pay bills in regular cycles including weekly and monthly obligations. Preparation, reconciliation and actual check writing is commonly referred to as cash disbursements.