KEY PERFORMANCE INDICATORS

Current ratio

Financials
Outcome

What is the current ratio?

The current ratio is a financial ratio that measures the ability of a business to pay its short-term debts and obligations. It is calculated by dividing the total current assets of a business by its total current liabilities. The higher the current ratio, the more able a business is to pay its short-term debts and obligations.

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Why is the current ratio important?

The current ratio is important for several reasons. First, it provides a snapshot of a business's financial health, and can indicate whether it has the funds and resources to meet its short-term obligations. Second, it can be used to compare the financial performance of a business over time, and to compare it to other businesses in the same industry. Third, it can help a business identify areas where it may be over- or under-leveraged, and can provide insight into potential risks and opportunities.

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How can I increase the current ratio?
There are several ways to increase the current ratio of a business. These include:
• Increasing the value of current assets: One way to increase the current ratio is to increase the value of the current assets of a business. This can involve increasing the amount of cash on hand, investing in short-term securities, or increasing inventory levels.
• Decreasing the value of current liabilities: Another way to increase the current ratio is to decrease the value of the current liabilities of a business. This can involve paying off short-term debts and obligations, or negotiating more favorable terms with creditors and suppliers.
• Diversifying the sources of funding: A third way to increase the current ratio is to diversify the sources of funding for a business. This can involve using a combination of equity, debt, and other financing options to balance the risks and rewards of each source.

Benchmark values for the current ratio

The benchmark values for the current ratio can vary depending on the industry and size of a business. Generally, a current ratio of 1.5 or higher is considered healthy, while a current ratio of less than 1.0 is considered problematic. However, it's important to note that these benchmarks are not set in stone, and can vary depending on the specific circumstances of a business.

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