Liquidity is a fundamental finical characteristic of a business, in order to be successful a business must have cash, to pay its debts and any expenses that may arise. The ability to liquefy assets, such as: inventory, marketable securities, prepaid expenses and account receivable, into cash in order to pay its bills is an important factor for any business to look at when assessing it finical statements (PPG. 337)
For Japheth Enterprises (Appendix 1. column 9) shows the Current Ratio to be 1.67, this indicates that Japheth Enterprises’s current Assets to Liabilities is currently 1:67. This essentially means that for every asset Japheth Enterprises has .67 of a debt. Or for every 1 debt Japheth Enterprises’s have 1.33 of an asset.
The current ratio is a good indicator of your business’s ability to liquefy and produce cash if required. This current ratio is slightly higher than the industry standard provided and much stronger than 2015 current ratio of 2.35, indicating that for every asset they had 3 liabilities, meaning their ability to liquefy was weak. 2016 current ratio of 1.67 shows a much stronger capability to liquefy assets into cash. However, column 10 shows your Quick Ratio calculation, this indicates Japheth Enterprises’s ability t...
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...ling it. This may be on site or with a third party storage solution. Essentially another cost to consider. Another cost of carrying inventory id the cost of capital such as insurance, interest on working capital and taxes. (http://www.managementstudyguide.com/inventory-costs.htm). These can be considered unnecessary costs for a small business when better inventory management can be practised.
As Japheth Enterprises’s accounts receivable turnover sits at 6.5 times a year, this indicates that a lot of cash is tied up in accounts receivable over the course of a year. As 80% of Japheth Enterprises’s sales are on credit ideally this turnover rate would be a lot higher to ensure that the cash is being reconciled within an acceptable time frame. It can be seen in coloum 8 that they reconcile accounts every 56 days, ideally this would be closer to every 30days.
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