MONITORING – RATIOS

An analytical tool that can be used to monitor the working capital is the accounting ratios, particularly the working capital ratios.  For this purposes, the following working capital ratios may be noted:

i)    Current ratio i.e., Current assets to Current liabilities ratio.
ii)    Liquid ratio i.e., Quick assets to Current liabilities ratio.
iii)    Current assets to total assets ratio.
iv)    Current assets to total sales ratio.

These ratios may be ascertained for a number of years to find out the emerging working capital position of the firm.  It may be noted that the Current Ratio is the most important one and it indicates the position of net working capital also.  If the Current Ratio is more than 1, then the net working capital is positive.  If the Current Ratio is 1, then the current assets are just equal to current liability and there is no net working capital.  Further, if the Current Ratio is less than 1, then the current assets are less than the current liabilities and the firm has negative net working capital.

The Current Ratio as well as the Quick Ratio, both indicate the liquidity position of the firm vis-à-vis the current liabilities.  However, the Quick Ratio is supposed to give a better indication of the liquidity since it excludes the stock which may not be immediately realizable.  The standard form of Current Ratio and Quick Ratio is taken as 2:1 and 1:1 respectively.

For more help in Monitoring - Ratios in working capital management please click the button below to submit your assignment: