Action to Correct Liquidity Problems
Where the calculation of the quick ratio indicates that the business is in danger of problems arising from illiquidity, the managers should examine ways of ensuring that this does not lead to greater problems. The levels of inventory held should be reviewed, as these levels may be unnecessarily high, and could perhaps be reduced by the introduction of more rational purchasing or delivery systems. This may require the introduction of new software and internal systems to regulate the business processes.
The business could also look for any unproductive assets, such as buildings, machinery or vehicles that are not being used to generate profits, and could sell any assets that are not necessary for carrying on the trade profitably. It might also be possible to look at negotiating improved terms of payment with creditors, so that they can be paid over a longer period. In an increasingly competitive and harsh business climate this may, however, be difficult.
The ease of calculating the quick ratio means that the business can compute this ratio at frequent intervals. The managers of the enterprise can therefore keep a constant watch on its liquidity position. The development of the quick ratio over time can be significant for the business. If the quick ratio is tending to decline as time passes, this can be a danger sign for the enterprise and the reasons for the decline should be examined. However the use of any accounting ratio is only a rough guide to the health of a business, and should be backed up by more detailed analysis as required.
ronnieb on www.morguefile.com/archive/display/102128
cohdra on www. morguefile.com/archive/display/16808