Financial liquidity in a company – how to determine it?
The foundation of the company’s long-term operation is achieving and maintaining its financial liquidity. It means the company’s ability to settle arising financial obligations related to its conduct. How can you determine if your business has liquidity? What to do to achieve and maintain it? What action should be taken when financial liquidity becomes threatened?
In the series related to the company’s financial liquidity, we will try to address all the most important threads in this aspect. We invite you to the first, which concerns determining financial liquidity.
Financial liquidity assessment
In order to be able to estimate whether an enterprise maintains financial liquidity, it is necessary to combine some of the most relevant information. Belong to them:
Balance sheet – is a list of the company’s assets (assets) and sources of financing assets (liabilities). The balance sheet is usually settled down at the end of the financial year, and the balance sheet moment is determined as at the balance sheet date.
Profit and loss statement – a document indicating the statement of financial operations. They are carried out over a specified time range and usually cover one year. The determination of an enterprise’s profit or loss is calculated on the basis of the difference between income and expenses.
Cash flow – a cash flow statement. It is a document in which the financial results of an enterprise are taken into account by calculating the difference between cash inflows and outflows.
Based on the obtained statements, it is possible to summarize the company’s financial condition and determine whether financial liquidity has been maintained and the scale of any deficiencies.
Measurement of financial liquidity
Financial indicators is a set of KPIs that help to assess the health of an enterprise. The right mix allows us to prepare reports and make analyzes. Financial ratios, however, are not only a tool for assessing financial liquidity. It is also a picture of how the enterprise functions and an opportunity to thoroughly check areas for improvement.
The basic features of financial indicators are measurability, comparability and interpretability. The key indicators are:
- current financial liquidity ratio
- accelerated liquidity ratio
- cash ratio
- immediate financial liquidity ratio
When looking for new suppliers or acquisition goals, it is necessary to assess the financial condition of the entity, collate relevant data and interpret it in the right way. It is then worth using the services of experts who professionally perform audits of companies. Thanks to this, it is not only possible to objectively assess the current situation in the company, but also to obtain recommendations and even a plan to restructure areas that are not profitable or bring losses.
Soon another article from the series “Financial liquidity in the company”.