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Forecast Liquidity Business Ratios

Forecasts for Liquidity describe whether or not a future cash flow crisis is on the cards. Rule no. 1 is that working capital never forecasts a deficit.

forecast for year beginning the 1st.May 2017May 2018May 2019
Key Liquidity Ratios
Debt to Asset Ratio61.4%41%33%

Total debt over total assets;  debt to asset ratio measures the extent to which assets are financed by liabilities. It describes the solvency of the business. If it falls below one, the business is insolvent.

Gearing (Leverage) Ratio66.8%4.1%--38.6%

Also known as leverage, gearing is the sum of long and short term loans (including factoring if selected) plus bank overdraft less cash divided by capital and reserves - i.e. shareholders / stockholders funds or equity. Negative leverage signals cash and cash convertible assets exceeding loans. Industry comparisons make a difference here but business planning should always focus on the importance of keeping the gearing or leverage ratio well below 100%.

Current Ratio (Working Capital) 1.412.092.79

Current assets over current liabilities measures working capital ratio. A ratio at or below 1.0 spells possible cash flow insolvency. A ratio above one which is accompanied by high levels of stock / inventory and accounts receivable however will degrade the value of this ratio, as will a high ratio of fixed to current assets.

Quick Ratio (Acid Test)0.60.891.86

Short term liquidity is defined by the quick ratio. This is a more demanding test than that provided by current ratio. The value of stock / inventory is disregarded as this takes longer to be turned into cash than accounts receivable. One or more is the ideal, although a small shortfall should not be regarded as a significant problem. Very low short term liquidity will most likely call for short term cash support.


These ratios describe both the solvency of a business and its ability to generate cash flow through its core trading activitity. Liquidity depends entirely on the proper management of current assets, such as effective cash collection from sales and maintaining efficient stock / inventory levels while properly planning decisions on investment in capital items.

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