What is financial liquidity?
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Liquidity refers to the easily available assets which can be easily transferred into the cash. Cash is the most liquid assets and in every organization there will be holding of the liquid as well as the non-liquid assets. There are shares and bonds on one side which can be easily transformed into the cash and on the other side there are properties and machineries and all which cannot be transferred into the cash easily.
Financial liquidity in companies
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Liquidity in companies is decided by the company’s ability to pay the current liability as against the use of the current assets. In liquidity perspective it is also seen that whether the company is able to make the cash against the liabilities it is creating. The company has to pay the rest of the money left over after the liabilities are paid to the shareholders as the dividend on the end of the year.
Importance of liquidity
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The liquidity is very much important as the cash is the only asset which can be considered as liquid; if the liquid ratios are not kept up to the mark there can be the problems in the liquidity of the entity. The liquidity shall be kept so that in the case of emergency the work of the entity don’t get interfered due to lack of cash and cash equivalent.so it is necessary that the entities keep their liquid ratios good so that there will not be problems of lack of cash and liquid assets.
Some of the liquid ratios
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The current ratio is one of the most important liquid ratios also known as the working capital ratio and it is calculated by dividing the current assets by the current liabilities. The current assets include the cash, stocks, securities and account receivables on the other hand the current liabilities include the short term liabilities like account payables and bill payables. So this ratio will show you how much liquid assets are there for the liabilities if the in the case of the emergency you have to pay to all your short term liabilities at the same time. The ideal current ratio is different in all the different industries but it is better to keep it more than 1.
The quick ratio:
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Also known as the acid test ratio by some people, it is like current ratio only but the inventory s removed from the current assets as some of the experts believe that it is difficult to turn the inventory into the cash in a very short period. So according to some experts the quick ratio gives the best analysis about the company’s results and the position.
The operating cash flow ratio:
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This ratio provides the ability to pay the current liabilities from the cash generated. So it shows how many times the current debt can be paid through the cash flow of same period. So it is obtained by dividing the operating cash flow by current liabilities. A higher number is better as it means that the company can pay the current debts from the cash inflow of same period. So, Here is the information about financial liquidity ratios.