A while ago I overheard a Credit Manager in Business Banking talking to a colleague about an application from a client and the conversation turned to the liquidity ratios from the financial statements.
The Credit Manager wasn’t very happy with the ratios and was telling the colleague that the business was short of liquidity and had inadequate easily accessible resources to meet its liabilities. Now, that’s certainly what liquidity means in the credit assessment context but you have to ask yourself whether the liquidity position of the business 6 months ago, when the financial statements were prepared, has any bearing on the situation today.
By all means consider liquidity as an important part of the assessment but make sure that the information you have is very current. Get a debtors list from last month end, or at least the outstanding debtors’s figure, together with the creditors’ figure at the same point and a rough indication of the stock figure from the client, include the short-term debt repayments for the next year and calculate your ratios from that. Don’t rely on stale information for what is, essentially, a measure of the business’ ability today to meet its current liabilities.