Cash & Liquidity: key terms, formulas and examples
Profit is an opinion, cash is a fact: a profitable company can still go bankrupt if cash runs out. Liquidity and working capital show whether you can pay bills on time.
Example
A shop sells on 90-day credit but pays suppliers in 30 days. It shows profit yet has a cash gap.
Takeaway
Track cash weekly, collect invoices fast and keep the current ratio above 1.
Key terms
- Cash flow
- Money moving in and out of a business over time.
- Liquidity
- How quickly an asset can be turned into cash without losing value.
- Working capital
- Current assets minus current liabilities: money for daily operations.
- Overdraft
- Spending more than your account holds by borrowing from the bank.
Formulas
Current ratioCA ÷ CL
Quick ratio(CA − Inv) ÷ CL
Days sales outstandingAR ÷ Sales × 365
Cash conversion cycleDIO + DSO − DPO
Free cash flow (FCF)OCF − CapEx
Receivables turnoverR ÷ AR
Interest coverage ratioEBIT ÷ I
Debt ratioD ÷ A × 100
Credit utilizationB ÷ L × 100
Savings rateS ÷ I × 100
Net worthA − L
Debt-to-income (DTI)D ÷ I × 100
Rent-to-income ratioR ÷ I × 100
Take-home payG × (1 − t)
Annual pay from hourly wagew × h × 52
Effective tax rateT ÷ I × 100
Real interest ratei − π
Interest-only paymentP × r ÷ 12
Working capital (amount)CA − CL
Cash runway (months)Cash ÷ Burn
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