Lesson 5 of 7 · All lessons in this module
- The operating cycle and the cash conversion cycleVideo lesson
- Shortening the cycle and the cost of trade creditVideo lesson
- Total and net working capital
- Liquidity and its primary and secondary sources
- Drags, pulls and liquidity ratiosVideo lesson
- Conservative, moderate and aggressive working capitalVideo lesson
- Short-term funding strategy
Lesson 5 of 7 · 13 min
Drags, pulls and liquidity ratios
Drags slow cash coming in and pulls speed cash going out; the current, quick and cash ratios measure how well short-term assets cover short-term liabilities.
In short
- A drag on liquidity delays cash inflows: uncollected receivables, obsolete inventory, tighter borrowing conditions.
- A pull on liquidity accelerates cash outflows or cuts credit: paying early, reduced supplier credit limits, limits on bank lines, chronically low liquidity.
- Current ratio = current assets ÷ current liabilities (broadest).
- Quick ratio = (cash + short-term marketable investments + receivables) ÷ current liabilities.
- Cash ratio = (cash + short-term marketable investments) ÷ current liabilities (most conservative). With inventory on the books: cash < quick < current.
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