Although the business economy is composed of numerous concepts, some of them really complex, there are two of them that you should master from the first day: liquidity and solvency. Although they may seem synonymous, in reality they are not.
And for the operation of your business to be correct, it is not enough that only one of them enjoy good health, but that both must be maintained in appropriate values. In this article we will focus on the liquidity ratios , which are really indicators to know if you have treasury problems in your business.
While solvency refers to the profitability of a company in the long term, what concerns us in this article has to do with the short term. Or what is the same: liquidity, which means the ability of a company to have money available to deal with their immediate payments, such as payroll, suppliers or rent the premises. To measure this, the most popular of the liquidity ratios is the one that responds to the following formula, whose result should be greater than 1: Liquidity ratio = Current assets / Current liabilities
Unfortunately, cash flows are very variable, so the previous formula can give wrong results depending on the moment in which the calculation is made. That is why we speak of average cash periods . Although it is not a ratio as such, it must be taken into account: it is necessary that the average period of payment to customers be adjusted with respect to the average period of payment to suppliers, employees, etc. Therefore, it is necessary to calculate it.
The coverage ratio is also another very useful indicator to manage, although in this case it is more complex. The central idea is that certain income should serve to ‘cover’ certain expenses. Stated more specifically:
The coverage ratio, whose result is the result of the combined calculation of these concepts, aims to keep both balance sheets under control.
All businesses, especially at the beginning of their business, have cash or liquidity problems at some time . If it becomes a chronic or permanent problem, the viability of the company will be compromised. If it is a specific problem, no. In fact, there are different ways to solve a particular liquidity problem.
One of them try to convert current assets into circulating money. This is not difficult, unlike the so-called ‘immobilized’ assets, which require at least a year to complete this process. The problem is that converting these current assets into money can be a strategic problem for the company, since these current assets can be funds reserved for investments or for other structural items.
There is another method, simpler and more immediate, to solve these problems of liquidity ratios. They are microcredits , which can be obtained without bureaucracy in Hank Morgan. Its operation is simple: you request a quantity of money and you indicate a term, you transfer the money to your account in a matter of minutes, you use it in whatever you want and you return it within the indicated date, normally in an immediate future also. Logically, it is a service that has a cost, but it brings important benefits to the company:
In Hank Morgan you can get from € 50 to € 750 immediately, without paperwork or travel, all through the Internet. The return period is never greater than 30 days and the return of the money, except for exceptions, is made in a single payment, which avoids medium and long-term indebtedness of the company.