In the past two posts we’ve been looking at the liquidity ratios and when we assess those ratios we tend to consider the assets element and often forget that we also have to look at the other side of the equation – the current liabilities.
These are what we should be concerned about most as lenders since they have the ability to severely restrict our customer’s ability to trade if they are not paid on time – they could even bring about our customer’s liquidation in extreme cases.
The question for us, then, is how the current liabilities are made up and what impact that has on our analysis of the customer’s liquidity position. We previously talked about how to analyse the current assets to determine how liquid they really are – our next concern is how urgent the current liabilities are and how that urgency relates to the ability of the customer to generate cash flow from the realisation of the current assets or through daily cash inflow.
Next time, in the last in this series of blog posts about liquidity ratios, we look at the information that you need to have to make an informed judgement about liquidity.