Liquidity and Solvency Ratios

During the continued slowdown of economic activity, we focused on the use of liquidity and solvency ratios in managing available cash in your business. Liquidity ratios provide indicators as to the company’s capacity to service debt in the short term while solvency ratios address the company’s ability to service long-term debt. Banks are especially interested in liquidity and solvency, showing the ability to pay rather than just securing the collateral of the loan.

Forecasts and budgets are key tools for successfully navigating this downturn. Best and worse case scenarios should be developed so that the company can prepare for either direction with confidence that enough cash is available for the continuance of operations. Weekly cash forecasts that tie to the budget aid in predicting potential cash crunches. Quarterly budget/forecast reviews allow for anticipation of cash needs and allow for strategies to be adjusted to reflect the changing environment.

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