Liquidity ratios

access_time 2019-02-01T06:07:45.906Z face CA N Raja BANKING

 

                                                       In the balance sheet you have two sides Liabilities side and Asset side. This liability side can be divided into two.Current liability and Long term liability.Similarly on the asset side can also be divided into two.One is current asset and the other one is Non current asset .Now let us focus on this current assets and current liability only when we say liquidity it is with reference to these two items only.That is liquidity is mainly influenced by position of your current liability with reference to current asset to put it clearly .Let's say this is your total liabilities size and this is your total asset size in which current liability occupy so much portion so out of your total liability and we know liability means something which you have to pay and for paying that you need resources and resources are Assets and for meeting current liability you have to be dependent on current asset and let's say you are current assets are only this much. It means you are in a trouble. Why? your current liability is more than your resources.That is you have to pay more but for paying that you have less current assets. It means there is a region where you are actually going to be in trouble .Reason you have to pay more but you have less it means this is danger zone. You are not having resources to pay your current liabilities. So we can say you have liquidity issue here to understand “liquidity means ability to pay off your short term liabilities and short term expenses without difficulty” here you have short term liability but for paying short term liability you don't have adequate short term resources .So liquidity ratios will help you to understand whether your business is having comfortable liquidity position or is it in a serious liquidity trouble .So please understand and appreciate if a concern is having liquidity issue it will be even more dangerous than reporting losses because some entities despite reporting good profit land into serious trouble because of liquidity issues and you’ll understand this better once we taken up each and every liquidity ratios in the following sessions.

 

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