Liquidity refers to the ability of a firm to meet its current, also called short-term, obligations when they become due for payment. There are two contradictory implications in the realisation of this concept. Liquidity requires ready availability of funds in response to claims by short-term creditors. Such availability, when viewed by the firm, requires funds to lie unproductively, i.e. idle and earning very little if at all. Thus.liquidity and profitability are the contradictory requirements to be implied by such ratios.The' ratios considered in this category are :
(i) Net working capital (which, strictly, is not a ratio),
(ii) Current ratio,
(iii) Acid-test, or, quick, ratio,
(iv) Superquick ratio, and
(v) Turnover ratios, with sub-categories.
Besides these, as a variant of (iii), Defensive Interval Ratio is also in vogue.
Net Working Capital
Net working capital (defined so far in the earlier articles only as working capital) is the excess of current assets over current liabilities :
NWC = (= WC) = CA - CL
We may recall the definitions : current assets are such assets which, in the normal course of business, get converted into cash over a short period, usually within one year. Current liabilities are those liabilities which are to be paid within a short-period, again usually within a year.
Reading the equation given above, it is immediately seen that, strictly speaking,NWC is not a ratio, but is a quantum of funds (convertible to cash quickly) quantifying the firm's liquidity status. Yet, there are no pre-determined criteria as to what would be adequate NWC. If company R has CA = Rs. 1,00,000 with CL = Rs. 70,000 with NWC thereby being Rs. 30,000 is to be compared with company S with its CA = Rs. 20,000 and its CL = Rs. 5,000, its NWC thereby being Rs. 15,000, it will be unwise to declare that R is 2 times as liquid as S by comparing NWC(R) at Rs. 30,000 with NWC(S) at Rs. 15,000. Quantumwise, Rs. 30,000 is more difficult to raise than Rs. 15,000.Moreover, R has its CA at only 1.43 times its CL whereas S has its CA at four times its CL. To overcome the inadequacies in such inferences, it is better to rely on the ratios in this category.
Current Ratio
This has also been called working capital ratio but this terminology is not adopted by many practitioners. Current ratio is the ratio of total current assets to total current liabilities, with CA and CL being understood as given under "Net Working Pn-;tnl"I
CR =(Total) CA/(Total) CL
CA include : Cash, bank balances, marketable securities, raw material inventories, (work-in-progress, or) semi-finished goods, finished goods, debtors net of provision for bad and doubtful debts, bills receivable and pre-paid expenses. CL include : Trade creditors, bills payable, bank credit (including all overdrafts) provision for taxation, dividends payable and all outstanding expenses.It is generally held that the higher the CR, the greater is the firm's ability to meet its current obligations and the more assured is the margin of safety for (as regards the funds due to) short-term creditors.Since funds flow through CA and CL accounts is never uniform over time, there arises the need for this safety margin. CA are liable to shrink for reasons of bad debts, obsolete and unsaleable inventory, losses in marketable securities, etc. In such a situation, CR is a measure of the buffer or cushion available to meet the obligations of CL through employing CA even as the value of CA may decline.
Any firm with a higher CR has better liquidity, i.e. short-term solvency. However,very high CR values would be indicative of slack practices of (an unequal) management evidenced by excessive inventories, poor credit management and unimaginatively high magnitudes of pre-paid expenses; also that the firm has not been making full use of the credit facilities available to it, viz. from trade creditors,bank overdrafts and accommodation of outstanding expenses.
Common refrain is that a CR of 2 is indicative of a satisfactory business positioning, subject to the pevalent conditions in the capital market, the nature of the industry, etc.When capital market is flush, as in capital-rich countries, long-term borrowings are easier and cheap too and hence current asset requirements are managed substantially through long-term borrowings thereby relieving the burden of current liabilities being increased, i.e. CR positioning is held high. But in cash-starved and under-developed countries, heavy short-term financing has often to be resorted to for maintaining current assets; (and when government helps in the matter, by extending credits and subsidies, etc., it always remains imminent thatkhese turn into bad and doubtful debts and pressures develop to write off loans). This affects CR adversely, i.e. lower CR values are commonly reported. To avoid the risk implicit in such practices by industries, the Tandon Committee (1974) has prescribed in India a minimum scale of current asset financing by long-term borrowed funds.
How the nature of the business or the industry influences what would be the satisfactory positioning as regards CR can also be now illustrated. Wholesale businesses, which may buy either on cash or on credit basis, but sell to retailers generally on credit basis, are thereby generally positioned at higher CR than retailers who receive from wholesalers on credit basis but sell on cash basis. But, in public utility companies, the need for current assets is limited and at the same the extent of current liabilities may be high, resulting in a low CR regime. In any case, CR less than 1 would be undesiratle in any business; and this is maintained through cash and bank balances and marketable securities.It is indisputable that the composition of the current assets will heavily bear on the dependability of the CR positioning. A high CR, composed mostly by semi-finished goods, (doubtful debts,) bills receivable and prepaid expenses is of an inferior quality than if otherwise. Whereas current liabilities are unalterable in the sense that they have to be met in full, and almost immediately on demand,current assets are beset by the quality of the asset as stated immediately above. To overcome such questionability as regards the quality of the CA; resort has been taken to by defining acid-test, or quick, ratio.
Acid-Test, or Quick Test, Ratio (QR)
Among the components of CA listed under Current Ratio, cash is the most liquid (and this includes bank balances also). Bills receivable may come next in liquidity ranking; inventories may rank next in liquidity in that they are to be converted into receivables and then into cash. Pre-paid expenses, by the nature of being against settlement of expenses committed for or anticipated, may not be liquid at all.Debtors are just as liquid as the concerned parties would behave. Such vast differences in liquidity ranking impair, or bring into question, the usefulness and even scope of validity of CR.
The acid-test, or quick, ratio, as a measure of liquidity, overcomes this defect in CR, by considering only the "quick" (current) assets and not the total CA. Quick (current) assets refer to current assets that can be converted into cash quickly (or immediately) (or at a short notice) without deminution of value. After excluding prepaid expenses and inventory, the category of current assets considered "quick" have, conventionally, been : (i) cash and bank balances, (ii) short-term marketable securities, and (iii) debtorslreceivables.
Acid-test, or Quick, ratio = Quick (current) Assets/ (Total) Current Liabilities
Like 2 : 1 having generally been considered a satisfactory value of CR, 1 : 1 has generally been considered a satisfactory value of QR. In any case, both CR and QR of any one firm should be considered relatively to the industry average value, respectively, for acceptable judgement on the firm's liquidity.
Super-Quick Ratio (SQR)
This is a truncated version of the QR. Within the "quick" assets, after excluding debtorslreceivables, only (i) Cash and bank balances, and (ii) Short-term marketable securities are taken as "super-quick current assets. This ratio between the superquick (current) assets and the total current liabilities of the firm at any given time is the most rigorous and conservative measure of a firm's liquidity status. As a relaxation to this most, conservative approach to liquidity measure, it has been permissible to include "reserve borrowing power (e.g., unutilised part of overdraft limit) in super-quick (current) assets, though overdraft, of received, is a current liability.
Illustration
Consider the following (detailed) information regarding a firm on a specified date.
In this case, CR =45,000/1,25,000
= 2.778 : 1
Acid-test, or Quick, Ratio, QR = (25,,000 + 18,000 + 4,000 + 6,000)/45,000
SQR =(43,000+ 12,000)/45,000
= 55,000/ 45,000
= 1.222 : 1
Turnover Ratios
When changing over from CR to QR in the above, deleted items within the CA are : inventory and prepaid expenses. Prepaid expenses merely reduce the amount of cash required in one (later) because of payment (made) in a prior period. This is, thus, technically not recoverable in general. So, deleting this, it is inventory that is the essential cause of distinction between CR and QR. Recognising this, it is fit to examine the liquidity as regards to how quickly inventory gets converted into cash.On the same lines, debtors (excluding bad and doubtful debts) can also be examined as to how quickly they get converted into cash. Also, as a comparable item to debtors, creditors can also be examined as to how quickly they are settled in cash. These three aspects, through strictly classifiable under activity ratios,affect liquidity also and hence are, for convenience-sake, now studied under Liquidity Ratios. These are respectively termed as :
(a) Inventory Turnover Ratio;
(b) Debtors Turnover Ratio; and
(c) Creditors Turnover Ratio.
Inventory Turnover Ratio
It is the ratio of cost of goods sold to average inventory, where cost of goods sold is indicated by sale minus gross profit and average inventory is the simple average,of the opening and closing inventory. This ratio indicates how fast inventory is converted into cash, i.e. is sold. A high value is indicative of good liquidity; a low value, of poor liquidity - where inventory does not sell but stays on shelf.Consider that goods sold were worth Rs. 10,00,000 inclusive of a gross profit margin of 25%; stock value at start of year being Rs. 1,20,000 and at end of year,Rs. 1,60,000. Then inventory turnover ratio would be as under : Cost of goods sold, net of profit = 75% of 10,00,000 = Rs. 7,50,000
[Note : This is not Rs. 8,00,000, which with its 25% (= Rs. 2,00,000) would be Rs. 10,00,000. Gross profit margin is, thus, on sale proceeds.]
Average inventory = (1,20,000 + 1,60,000)/2 = Rs. 1,40,000.
(i) Net working capital (which, strictly, is not a ratio),
(ii) Current ratio,
(iii) Acid-test, or, quick, ratio,
(iv) Superquick ratio, and
(v) Turnover ratios, with sub-categories.
Besides these, as a variant of (iii), Defensive Interval Ratio is also in vogue.
Net Working Capital
Net working capital (defined so far in the earlier articles only as working capital) is the excess of current assets over current liabilities :
NWC = (= WC) = CA - CL
We may recall the definitions : current assets are such assets which, in the normal course of business, get converted into cash over a short period, usually within one year. Current liabilities are those liabilities which are to be paid within a short-period, again usually within a year.
Reading the equation given above, it is immediately seen that, strictly speaking,NWC is not a ratio, but is a quantum of funds (convertible to cash quickly) quantifying the firm's liquidity status. Yet, there are no pre-determined criteria as to what would be adequate NWC. If company R has CA = Rs. 1,00,000 with CL = Rs. 70,000 with NWC thereby being Rs. 30,000 is to be compared with company S with its CA = Rs. 20,000 and its CL = Rs. 5,000, its NWC thereby being Rs. 15,000, it will be unwise to declare that R is 2 times as liquid as S by comparing NWC(R) at Rs. 30,000 with NWC(S) at Rs. 15,000. Quantumwise, Rs. 30,000 is more difficult to raise than Rs. 15,000.Moreover, R has its CA at only 1.43 times its CL whereas S has its CA at four times its CL. To overcome the inadequacies in such inferences, it is better to rely on the ratios in this category.
Current Ratio
This has also been called working capital ratio but this terminology is not adopted by many practitioners. Current ratio is the ratio of total current assets to total current liabilities, with CA and CL being understood as given under "Net Working Pn-;tnl"I
CR =(Total) CA/(Total) CL
CA include : Cash, bank balances, marketable securities, raw material inventories, (work-in-progress, or) semi-finished goods, finished goods, debtors net of provision for bad and doubtful debts, bills receivable and pre-paid expenses. CL include : Trade creditors, bills payable, bank credit (including all overdrafts) provision for taxation, dividends payable and all outstanding expenses.It is generally held that the higher the CR, the greater is the firm's ability to meet its current obligations and the more assured is the margin of safety for (as regards the funds due to) short-term creditors.Since funds flow through CA and CL accounts is never uniform over time, there arises the need for this safety margin. CA are liable to shrink for reasons of bad debts, obsolete and unsaleable inventory, losses in marketable securities, etc. In such a situation, CR is a measure of the buffer or cushion available to meet the obligations of CL through employing CA even as the value of CA may decline.
Any firm with a higher CR has better liquidity, i.e. short-term solvency. However,very high CR values would be indicative of slack practices of (an unequal) management evidenced by excessive inventories, poor credit management and unimaginatively high magnitudes of pre-paid expenses; also that the firm has not been making full use of the credit facilities available to it, viz. from trade creditors,bank overdrafts and accommodation of outstanding expenses.
Common refrain is that a CR of 2 is indicative of a satisfactory business positioning, subject to the pevalent conditions in the capital market, the nature of the industry, etc.When capital market is flush, as in capital-rich countries, long-term borrowings are easier and cheap too and hence current asset requirements are managed substantially through long-term borrowings thereby relieving the burden of current liabilities being increased, i.e. CR positioning is held high. But in cash-starved and under-developed countries, heavy short-term financing has often to be resorted to for maintaining current assets; (and when government helps in the matter, by extending credits and subsidies, etc., it always remains imminent thatkhese turn into bad and doubtful debts and pressures develop to write off loans). This affects CR adversely, i.e. lower CR values are commonly reported. To avoid the risk implicit in such practices by industries, the Tandon Committee (1974) has prescribed in India a minimum scale of current asset financing by long-term borrowed funds.
How the nature of the business or the industry influences what would be the satisfactory positioning as regards CR can also be now illustrated. Wholesale businesses, which may buy either on cash or on credit basis, but sell to retailers generally on credit basis, are thereby generally positioned at higher CR than retailers who receive from wholesalers on credit basis but sell on cash basis. But, in public utility companies, the need for current assets is limited and at the same the extent of current liabilities may be high, resulting in a low CR regime. In any case, CR less than 1 would be undesiratle in any business; and this is maintained through cash and bank balances and marketable securities.It is indisputable that the composition of the current assets will heavily bear on the dependability of the CR positioning. A high CR, composed mostly by semi-finished goods, (doubtful debts,) bills receivable and prepaid expenses is of an inferior quality than if otherwise. Whereas current liabilities are unalterable in the sense that they have to be met in full, and almost immediately on demand,current assets are beset by the quality of the asset as stated immediately above. To overcome such questionability as regards the quality of the CA; resort has been taken to by defining acid-test, or quick, ratio.
Acid-Test, or Quick Test, Ratio (QR)
Among the components of CA listed under Current Ratio, cash is the most liquid (and this includes bank balances also). Bills receivable may come next in liquidity ranking; inventories may rank next in liquidity in that they are to be converted into receivables and then into cash. Pre-paid expenses, by the nature of being against settlement of expenses committed for or anticipated, may not be liquid at all.Debtors are just as liquid as the concerned parties would behave. Such vast differences in liquidity ranking impair, or bring into question, the usefulness and even scope of validity of CR.
The acid-test, or quick, ratio, as a measure of liquidity, overcomes this defect in CR, by considering only the "quick" (current) assets and not the total CA. Quick (current) assets refer to current assets that can be converted into cash quickly (or immediately) (or at a short notice) without deminution of value. After excluding prepaid expenses and inventory, the category of current assets considered "quick" have, conventionally, been : (i) cash and bank balances, (ii) short-term marketable securities, and (iii) debtorslreceivables.
Acid-test, or Quick, ratio = Quick (current) Assets/ (Total) Current Liabilities
Like 2 : 1 having generally been considered a satisfactory value of CR, 1 : 1 has generally been considered a satisfactory value of QR. In any case, both CR and QR of any one firm should be considered relatively to the industry average value, respectively, for acceptable judgement on the firm's liquidity.
Super-Quick Ratio (SQR)
This is a truncated version of the QR. Within the "quick" assets, after excluding debtorslreceivables, only (i) Cash and bank balances, and (ii) Short-term marketable securities are taken as "super-quick current assets. This ratio between the superquick (current) assets and the total current liabilities of the firm at any given time is the most rigorous and conservative measure of a firm's liquidity status. As a relaxation to this most, conservative approach to liquidity measure, it has been permissible to include "reserve borrowing power (e.g., unutilised part of overdraft limit) in super-quick (current) assets, though overdraft, of received, is a current liability.
Illustration
Consider the following (detailed) information regarding a firm on a specified date.
In this case, CR =45,000/1,25,000
= 2.778 : 1
Acid-test, or Quick, Ratio, QR = (25,,000 + 18,000 + 4,000 + 6,000)/45,000
SQR =(43,000+ 12,000)/45,000
= 55,000/ 45,000
= 1.222 : 1
Turnover Ratios
When changing over from CR to QR in the above, deleted items within the CA are : inventory and prepaid expenses. Prepaid expenses merely reduce the amount of cash required in one (later) because of payment (made) in a prior period. This is, thus, technically not recoverable in general. So, deleting this, it is inventory that is the essential cause of distinction between CR and QR. Recognising this, it is fit to examine the liquidity as regards to how quickly inventory gets converted into cash.On the same lines, debtors (excluding bad and doubtful debts) can also be examined as to how quickly they get converted into cash. Also, as a comparable item to debtors, creditors can also be examined as to how quickly they are settled in cash. These three aspects, through strictly classifiable under activity ratios,affect liquidity also and hence are, for convenience-sake, now studied under Liquidity Ratios. These are respectively termed as :
(a) Inventory Turnover Ratio;
(b) Debtors Turnover Ratio; and
(c) Creditors Turnover Ratio.
Inventory Turnover Ratio
It is the ratio of cost of goods sold to average inventory, where cost of goods sold is indicated by sale minus gross profit and average inventory is the simple average,of the opening and closing inventory. This ratio indicates how fast inventory is converted into cash, i.e. is sold. A high value is indicative of good liquidity; a low value, of poor liquidity - where inventory does not sell but stays on shelf.Consider that goods sold were worth Rs. 10,00,000 inclusive of a gross profit margin of 25%; stock value at start of year being Rs. 1,20,000 and at end of year,Rs. 1,60,000. Then inventory turnover ratio would be as under : Cost of goods sold, net of profit = 75% of 10,00,000 = Rs. 7,50,000
[Note : This is not Rs. 8,00,000, which with its 25% (= Rs. 2,00,000) would be Rs. 10,00,000. Gross profit margin is, thus, on sale proceeds.]
Average inventory = (1,20,000 + 1,60,000)/2 = Rs. 1,40,000.
Then, Inventory Turnover Ratio =7,50,000/1,40,000= 5.357, (say 5.4) times a year; from which, inventory holding period (on an average) =365/5.357
=68.135
= 68 (Calendar) days
A high value of Inventory Turnover Ratio could indicate that the firm is not maintaining adequate inventory, to save customers' needs and is thereby losing business. On the other hand, a low turnover ratio indicates an inordinately high level of inventory, thereby increasing cosk on interest on funds locked up and on storage space and on security and possibly loss by obsolescence, deterioration,
wastage and pilferage.
Debtors Turnover Ratio
It is the ratio of net credit sales (i.e. gross credit sales minus returns, if any, from customers) to average debtors outstanding during the year (as the simple average of debtors at the beginning and at the end of the year). This measures how rapidlydebts are collected. A high ratio indicates a short time lag between credit sales and cash collection and reflects on effective performance in debts collection and on reliable customers. A low ratio indicates inordinate delays in the matter and thereby a sluggish performance and difficult customers.
Consider that a firm made gross credit sales of Rs. 8,00,000 during the year, of which goods of Rs. 1,40,000 were returned. Also that the outstanding amount of debt at the beginning and end of the year were, respectively, Rs. 90,000 and Rs. 72,000. The debtors turnover ratio will be : 6,60,000 i. 81,000 = 8.148 times per year, with corresponding avenge debt collection period being
(365/8.148)= 44.8 (Calendar) days.
Creditors -mover Ratio
It is defined on the same lines as Debtors Turnover ratio, by considering creditors (or net credit purchases) in place of debtors (or net credit sales). A low value of the ratio reflects liberal credit terms granted by suppliers whereas a high value shows that there is pressure to settle with payments rapidly. When read with the CR, a low value of Creditors Turnover Ratio is indicative of a more comfortable business environment for the firm.
Consider that a firm has made credit purchases of Rs. 6,00,000 of which Rs. 1,00,000 was returned to suppliers during the year and that the amounts payable to creditors at the beginning and at the end of the year have been Rs. 1,24,000, and Rs. 1,32,000, respectively. Creditors Turnover Ratio would be
(6.00,OOO - 1 ,OO,OOO)/1/2((1,24,000 + 1,32,000)) 3.906 times a year, whereby the average creditors
payment period will be = 365 + 3.906 = 93- (Calendar) days.
Defensive Interval Ratio (DIR)
Apart from paying its current liabilities, the firm should also be able to meet its projected daily expenditure on operations. DIR is a measure of this aspect of liquidity. It is the ratio between quick (liquid) assets (i.e. excluding inventory and prepaid expenses from current assets) and the (average) projected daily cash operating requirements (PDCOR). PDCOR is generally projected from past experiences but considering forthcoming planned schedules of activities. It is composed of cost of goods sold (exclusive of profit) plus selling and administrative expenditure and other ordinary cash expenses, i.e. excluding non-cash expenses like depreciation and amortisation from cash operating expenses. (Note the distinction between the words "expenses" and "requirements" followig the words "cash operating" as highlighted above.) DIR quantifies (by its "dimension" of "days") (in that sense, it is not a dimensionless ratio) the time span through which a firm can operate drawing out of its present quick (liquid) assets (viz. cash, bank balance, marketable securities and cash collected from debtors and on bills receivable) without (having to wait for) drawing out of next year's income.
Consider the situation where the total of projected cash operating expenditure of a firm for the forthcoming year is Rs. 23,00,000. Its quick current assets at the beginning of this forthcoming period is Rs. 3,15,000. Determine the defensive interval ratio in weeks. In this case, projected weekly cash operating requirements will be (on 52 weeks per year) = Rs. 23,00,000 .+ 52 = Rs. 44,231; and DIR will then be (3,15,000/44231)= 7.12 weeks, say, 7 weeks. This means that the firm has quick (liquid) assets which can help it to meet the cash operating requirements of its business through 7 weeks into the forthcoming year without having to resort to future revenues. This ratio is very important in construction industry, considering the possible out-of-way locations of its work sites and the sort of labour, POL and other inputs used by the industry.
=68.135
= 68 (Calendar) days
A high value of Inventory Turnover Ratio could indicate that the firm is not maintaining adequate inventory, to save customers' needs and is thereby losing business. On the other hand, a low turnover ratio indicates an inordinately high level of inventory, thereby increasing cosk on interest on funds locked up and on storage space and on security and possibly loss by obsolescence, deterioration,
wastage and pilferage.
Debtors Turnover Ratio
It is the ratio of net credit sales (i.e. gross credit sales minus returns, if any, from customers) to average debtors outstanding during the year (as the simple average of debtors at the beginning and at the end of the year). This measures how rapidlydebts are collected. A high ratio indicates a short time lag between credit sales and cash collection and reflects on effective performance in debts collection and on reliable customers. A low ratio indicates inordinate delays in the matter and thereby a sluggish performance and difficult customers.
Consider that a firm made gross credit sales of Rs. 8,00,000 during the year, of which goods of Rs. 1,40,000 were returned. Also that the outstanding amount of debt at the beginning and end of the year were, respectively, Rs. 90,000 and Rs. 72,000. The debtors turnover ratio will be : 6,60,000 i. 81,000 = 8.148 times per year, with corresponding avenge debt collection period being
(365/8.148)= 44.8 (Calendar) days.
Creditors -mover Ratio
It is defined on the same lines as Debtors Turnover ratio, by considering creditors (or net credit purchases) in place of debtors (or net credit sales). A low value of the ratio reflects liberal credit terms granted by suppliers whereas a high value shows that there is pressure to settle with payments rapidly. When read with the CR, a low value of Creditors Turnover Ratio is indicative of a more comfortable business environment for the firm.
Consider that a firm has made credit purchases of Rs. 6,00,000 of which Rs. 1,00,000 was returned to suppliers during the year and that the amounts payable to creditors at the beginning and at the end of the year have been Rs. 1,24,000, and Rs. 1,32,000, respectively. Creditors Turnover Ratio would be
(6.00,OOO - 1 ,OO,OOO)/1/2((1,24,000 + 1,32,000)) 3.906 times a year, whereby the average creditors
payment period will be = 365 + 3.906 = 93- (Calendar) days.
Defensive Interval Ratio (DIR)
Apart from paying its current liabilities, the firm should also be able to meet its projected daily expenditure on operations. DIR is a measure of this aspect of liquidity. It is the ratio between quick (liquid) assets (i.e. excluding inventory and prepaid expenses from current assets) and the (average) projected daily cash operating requirements (PDCOR). PDCOR is generally projected from past experiences but considering forthcoming planned schedules of activities. It is composed of cost of goods sold (exclusive of profit) plus selling and administrative expenditure and other ordinary cash expenses, i.e. excluding non-cash expenses like depreciation and amortisation from cash operating expenses. (Note the distinction between the words "expenses" and "requirements" followig the words "cash operating" as highlighted above.) DIR quantifies (by its "dimension" of "days") (in that sense, it is not a dimensionless ratio) the time span through which a firm can operate drawing out of its present quick (liquid) assets (viz. cash, bank balance, marketable securities and cash collected from debtors and on bills receivable) without (having to wait for) drawing out of next year's income.
Consider the situation where the total of projected cash operating expenditure of a firm for the forthcoming year is Rs. 23,00,000. Its quick current assets at the beginning of this forthcoming period is Rs. 3,15,000. Determine the defensive interval ratio in weeks. In this case, projected weekly cash operating requirements will be (on 52 weeks per year) = Rs. 23,00,000 .+ 52 = Rs. 44,231; and DIR will then be (3,15,000/44231)= 7.12 weeks, say, 7 weeks. This means that the firm has quick (liquid) assets which can help it to meet the cash operating requirements of its business through 7 weeks into the forthcoming year without having to resort to future revenues. This ratio is very important in construction industry, considering the possible out-of-way locations of its work sites and the sort of labour, POL and other inputs used by the industry.
No comments:
Post a Comment