What is enterprise liquidity?
What it is?
The term “enterprise liquidity” represents the level of conversion of existing property into funds by which an organization can pay for services rendered to it or short-term liabilities. Consequently, the higher the speed of such operations, the higher the level of solvency of the enterprise, and hence the liquidity in general.
This parameter can be estimated using a set of financial indicators and ratios. All these measures allow us to relate the price determination of the value of assets of the current period, as well as all existing liabilities. At the same time, assets may have different levels of conversion.
Currently, the liquidity of the company may consist of four indicators: the current, total and absolute liquidity ratios, as well as pure working capital. Consider each of them in more detail.
This indicator reflects the ability of the enterpriseto finance the required liabilities through the sale of working capital as the fastest-selling part of the entire set of assets. The liquidity of the company with respect to this parameter allows you to determine the overall assessment of all available funds. Due to the fact that the repayment of the necessary obligations is made through the sale of current assets, the level of mobility can be maintained at a normal level by fulfilling a simple condition. It states that the value of current assets must exceed the amount of current liabilities. The liquidity of the enterprise is considered optimal if this ratio is in the range from 1.5 to 2.5. Values less than 1.5 are considered undesirable because it is necessary to take into account that the level of liquidity of some indicators may differ significantly from others, which means that it is allowed that not all assets will be fully realized. As a result, there is a possibility that not all liabilities will be repaid, and this will lead to a significant deterioration in the financial condition of the organization as a whole.
Current liquidity ratio
This value determines the number of current liabilities of the organization, which it can repay using cash and financial investments. This indicator determines the ability of an enterprise to make timely settlements on existing accounts.
Absolute liquidity ratio
It expresses part of short-term liabilities that an organization can pay off without additional selling assets. The liquidity of the enterprise, determined by this parameter, is considered sufficient if the value of the coefficient exceeds 0.3.
Net working capital
It supports the financial stability of the company, since one-time deductions from existing assets can significantly undermine its solvency.
How to increase the liquidity of the company?
The solution of this issue is an important task of accounting departments. In the general case, it is necessary to make rational use of funds and stocks, to prevent their distraction and unnecessary expense.