Posts Tagged ‘liquidity’

The Cash Conversion Cycle

If you read my postings on a regular basis I may sound like a broken record with how much I focus on cash. But again, as I’ve said before, “Profit is nothing until it is converted to cash.” See Cash Flow – The Bottom Line. Now I want to delve into how efficiently we convert financial activity to cash.

Cash Conversion Cycle Formula

First we need to identify some abbreviations and definitions: Read the rest of this entry »


Debt Coverage

In the posting Why Debt Ratios Matter we looked briefly at what debt really is, one way of measuring it, and how the mix of debt and equity played a role in how appropriately a business was financed. Now let’s look at servicing debt, also known as debt coverage.

What Determines Debt Coverage?

Think about this from a personal perspective. Imagine you took out a loan to buy some furniture for your home, and it was one of those loans where you only paid interest for the first year. Starting in the second year you would be required to start Read the rest of this entry »


Importance of Liquidity

In my last three posting, Necessity of Working Capital, The Current Ratio Matters and Quick Ratio Analysis we looked at three ways to asses a company’s liquidity. While working capital, the current ratio, and the quick ratio are useful liquidity measures, they may need some refinement. Let’s dig a little deeper and try to understand more about the importance of liquidity and why just the basic calculation of any of these may not be as helpful as we may have first thought. Read the rest of this entry »


Internal Funding

At some point every business faces a funding issue. Without cash to operate it is nearly impossible to achieve your goals.

The Timing Varies

It is not unusual for a start-up to struggle finding adequate capital for the initial phases of operation, particularly if the start-up will be a slow process. Most banks are not too keen on loaning in this situation and it can be extremely difficult to identify other sources. This is why so many start-ups are owner financed (internal funding) until they prove they are viable.

Other businesses require very little seed money to get rolling but face capital issues when they reach a certain size. They may find they cannot purchase the equipment, rent the necessary facilities, or purchase adequate inventory to grow. However, if their track record is solid, they demonstrate a sound growth plan, and Read the rest of this entry »


The Liquidity Trap

Sometimes financial calculations are not what they at first seem. That is, we may not be able to take them at face value. I previously discussed a little about what financial analysis can do for you in Things Financial Analysis Can Tell You. In that post two things mentioned were the current ratio and the quick ratio. Let’s look at these a little closer. To do this we’ll use Read the rest of this entry »


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