Quick Ratio

The text book definition is current assets less inventory, divided by current liabilities. It is an ineffective tool for the small business using this definition. The small business owner should use cash divided by current liabilities less current portion of long term debt. It is strictly designed to define the ability to pay your bills right now.

Operating Cash Ratio – Formula and Understanding

Operating Cash Ratio - Formula and Understanding

Far and above the most valuable liquidity ratio is the operating cash ratio.  Unlike the other liquidity ratios that are balance sheet derived, the operating cash ratio is more closely connected to activity (income statement based) ratios than the balance sheet.   Its primary element, the numerator in this formula is based on the income statement’s...

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Working Capital Cycle

The college textbook definition of working capital is current assets minus payables and accrued expenses.  The term explains the dollar value of flexibility a business operation has to take advantage of immediate opportunities or endure sudden or long-term setbacks.  Since it is a balance sheet based formula the value is a function of a moment …

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EBITDA – Drawbacks

This is Part III in a 3-part series.  Please read Parts I and II before continuing: EBITDA – Part I  standard formula and income statement adjustments EBITDA – Part II  balance sheet impact There are several business financial attributes required for EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to work well as a basis...

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Working Capital Management – Fundamentals

Working capital management is a function of finance whereby management ensures adequate cash is available to meet operational needs over the typical working capital cycle.   The underlying elements of working capital management include 1) understanding the different forms of current assets and current liabilities and their corresponding cash cycles; 2) recognizing the relationships of production …

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Insolvency and Bankruptcy – Know the Difference

Every business owner needs to know the difference between insolvency and bankruptcy.  Often these two terms are misunderstood and improperly used in conversation.  You need to know their correct meaning because both are used in civil law and both have different issues to address during the process.  In addition, understanding these two terms builds a...

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Quick Ratio – Definition, Explanation and Proper Use

Quick Ratio

The quick ratio is a formula used in business to identify the ability of a business to pay its current liabilities.  It is also known as the ‘Acid Test’ formula (ratio).  In the large markets this formula is one of the financial industry ratios used to value the stock of a corporation.  In the arena of the small business, you should only use this ratio as a means to gauge ability to pay your bills right now.

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