Inventory Turnover = Cost of Goods Sold / Average Inventory Solvency Ratios Debt Ratio Monitoring inventory turnover gives an early warning of potential slowing of cash flows. Speed in inventory turn is directly related to cash availability. A higher turnover rate indicates that inventory is moving quickly, minimizing the risk of carrying items that could become obsolete or that incur high carrying costs. This ratio indicates the number of times that inventory is turned over within a year. The tracking of aging is most helpful in monitoring slowing payments and allows customers to be followed up to keep payments timely. AR is broken down into those that are greater than 30 days, 60 days, 90 days, etc. While there are credit card fees, the speed of cash flow, avoidance of bad debts, added convenience to customers, and ease of transactions make it worthwhile.ĪR days sales outstanding = AR / Sales on AR Many companies accept credit cards, avoiding AR altogether. Note that this ratio is sales on AR, not all sales. This ratio tells us the average length of time a sale on AR takes to turn into cash. Different businesses have differing rates so the trend is what needs to be monitored.ĪR Turnover = Sales on Account / Average AR Accounts Receivable Days Sales Outstanding The higher the turnover, the faster the company is converting AR to cash. This ratio indicates how many times AR turns over completely within a year. In order to understand how quickly your company converts Accounts Receivables into cash, calculate the turnover of AR. In an economic downturn, this monitoring is critical for anticipating cash for debt payments. The next set of ratios is designed to monitor the speed at which current assets become cash. As noted above, current ratio does not say that cash in-flows will match payments (below). If the current ratio is 1.25, then each $1 of current liabilities has $1.25 of current assets to satisfy it. The current ratio is another working capital assessment tool that shows the percentage of coverage current liabilities have.Ĭurrent Ratio = Current Assets / Current Liabilities Today extra working capital is a blessing to be guarded. Future cash in-flows and payment scheduling is critical. Negative working capital is a serious warning that the company has current liabilities in excess of current assets and can easily face a liquidity crisis. However, the speed that AR and Inventory become cash becomes the next focus. Positive working capital shows sufficient current assets to meet current liabilities. Working Capital = Current Assets – Current Liabilities While there are many ratios that a company can consider in analyzing the financial statements, one of the most vital is current liquidity. Quarterly budget/forecast reviews allow for anticipation of cash needs and allow for strategies to be adjusted to reflect the changing environment. Weekly cash forecasts that tie to the budget aid in predicting potential cash crunches. Best and worse case scenarios should be developed so that the company can prepare for either direction with confidence that enough cash is available for the continuance of operations. Unlike sales, expenses seem to remain steady and while vendors are seeking cash more quickly, Accounts Payable payments tend to be deferred in order to conserve cash.įorecasts and budgets are key tools for successfully navigating this downturn. Liquidity becomes the point of focus for survival. The current economy has caused sales to slow dramatically and the time frame to collect Accounts Receivables to lengthen.

Banks are especially interested in liquidity and solvency, showing the ability to pay rather than just the collateral securitizing the loan. Liquidity ratios provide indicators as to the company’s capacity to service debt in the short term while solvency ratios address the company’s ability to service long-term debt. We assume that your enterprise is utilizing financial statements on a regular basis that are accurate. It is crucial to focus on the use of liquidity and solvency ratios in managing available cash in your business.

Ar turnover