Module 1 - DB#3

What is the relevance or importance of liquidity ratios?

How do internal and external stakeholders utilize liquidity ratios?

Which liquidity ratio is most important and why?

Why is Cash on Hand considered a critical ratio?

What is the relevance or importance of liquidity ratios?
• It communicates to the user the ability of the company to convert assets to cash and pay off debt.

How do internal and external stakeholders utilize liquidity ratios?
• Internal stakeholders utilize liquidity ratios to analyze whether the organization can convert its assets into cash and pay the debts off if they needed to close the business. External stakeholders utilize the liquidity ratios when analyzing whether to extend credit to the organization and what kind of terms they should use.

Which liquidity ratio is most important and why?
• The current ratio because it communicates to the user the ability of the organization to pay its short-term debts.

Why is Cash on Hand considered a critical ratio?
• Because it is necessary to implement the strategy of the organization. The organization cannot borrow money for every strategy that it wants to implement so it needs cash on hand for those items.