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Performance measurement techniques

2.2 Measuring liquidity

Liquidity means having cash, or ready access to cash. Liquid assets are
therefore cash and short-term investments that can be readily sold if the
need arises. In addition, liquidity is improved by unused bank borrowing
facilities.

Liquidity is improved through efficient cash management, and an important element
of good cash management is control over inventory, trade receivables and trade
payables

There are two liquidity ratios that are used to give an indication of a
company’s ability to manage short term financial obligations.

 Current ratio = current assets ÷ current liabilities

 Acid test (Quick ratio) = (current assets – inventories) ÷ current
liabilities

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