If you have gone to a financial institution to request a loan and they declined to give you that extended line-of-credit or that new term loan, one of the determining factors they used to make their decision was most likely your company’s liquidity ratios. Understanding them prior to talking to your lender can help you to better prepare for that discussion and hopefully help you to secure the financing you are requesting.
Owners and managers can understand how their businesses are performing by understanding these liquidity ratios;
Return on Equity Ratio (ROE)
Return on Asset Ratio (ROA)
Asset Turnover Ratio
Account Receivable Collection Period
Current Ratio
Quick Ratio (Acid Ratio)
Debt to Asset Ratio
We will look at the three ratios your banker will probably look at first; Current Ratio, Quick ratio, and Debt to Asset Ratio.
Your Current Ratio is calculated by dividing your current assets found on your balance sheet by your current liabilities, also found on your balance sheet. This ratio is often expected to be a 2 to 1 ratio, assets to liabilities.
 Your Quick Ratio (also known as your Acid Ratio) is calculated by dividing your current assets minus your inventory by your current liabilities found on your balance sheet. This ratio if often expected to be a 1 to 1 ratio, assets minus inventory to liabilities.Â
Your Debt to Asset Ratio is calculated by dividing your total liabilities found on your balance sheet by your total assets, also found on your balance sheet. This ratio may be depended on your industry. Here is why you need industry benchmarks in order to analyze what the information is telling you.
Knowing these three ratios and how your organization performs to your industry averages can greatly enhance the conversation between you and your lender.
Let me know what you think,
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