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Liquidity calculation & forecasting

Business liquidity is put under pressure during a period of crisis, making effective liquidity management a must for all businesses. The liquidity of a company measures its capacity to raise cash to settle current liabilities, and it’s important to understand the status of your cash liquidity today and in the coming months.

Definition of liquidity

Liquidity indicates whether your business can meet all of its short-term payment obligations. Creditworthiness is an indication of long-term payment obligations. It is important to understand the current state of your liquidity, to understand if you have enough cash to pay all your short-term debts.

By calculating your liquidity, you know if your business can get cash quickly. It allows you to pay your suppliers and salaries or make an investment for your business plans.

Why is it important to calculate your liquidity?

By calculating your liquid assets, you know whether your business can get cash quickly. With this, you can pay your suppliers and salaries or make an investment for your business plans. Effective management of your business liquidity helps you to:

  • Generate cash quickly in the face of expected cash deficits, such as unpaid debts
  • Obtain financing to grow your business, for example.

Economically unstable periods cause a sharp drop in liquidity for many companies. In some cases, this even leads to the failure of solvent but illiquid companies. Therefore, continuous assessment of available cash and company liquidity is important.

How to calculate your current liquidity?

There are 2 ways to calculate your company's liquidity: the current ratio or the quick ratio . Below is an explanation of both ratios.

The Current ratio

This is how you calculate the current ratio:

Current assets / Short-term debts

Current assets : stocks, debtors, money in the bank and in cash.

Short-term debts: outstanding invoices, taxes payable and debts that you have to repay within 1 year.

With a current ratio of at least 1.5, your business is generally considered financially sound. Current assets are then 1.5 times greater than current liabilities.
 

The Quick ratio

You calculate the quick ratio as follows:

Current assets - Inventories / Short-term debts

This calculation method is especially suitable for companies with a lot of stock and a relatively low turnover rate.

Turnover rate: indicates how long your stocks remain in the warehouse.

A quick ratio above 1 is generally considered safe. This is because it means you can meet your short-term debts with available cash. You are not dependent on your stocks for this, these are not taken into account.

Making a liquidity forecast with our handy calculator

With a liquidity forecast, also known as a cash flow forecast, you chart all expected income and expenses for your business in an accurate and complete manner. You can use the liquidity calculator below for this purpose.

Here's how it works:

  1. Complete all fields to reflect your current liquidity. Without taking into account the impact of any new negative external factors.
  2. Press 'calculate' to display the graph. This chart shows your company's liquidity over time. 
  3. Once you have insight into your current liquidity, it's a good time to chart what the 'worst case' and 'best case' secnarios would be. To do this, press 'change your data' and gain insight into future liquidity scenarios. For example, what would be the impact on your company's liquidity if revenues, arrears, costs or defaults increase/decrease?  

Start making your forecast immediately

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This Allianz Trade liquidity simulator tool is our proprietary and is protected by copyright. The Allianz Trade and Allianz logos are trademarks or registered trademarks belonging to the Allianz Group. Allianz Trade is the trademark used to designate a range of services provided by Euler Hermes. The use of our liquidity simulator tool is granted to you for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. Our Allianz Trade liquidity simulator tool should not be reproduced and its outputs should not be disclosed without our consent. Given that this tool uses assumptions which are simplified versions of business reality, it is only intended as an illustrated example showing the potential impact of a range of predefined factors. We make no representation nor warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Our tool’s features are subject to change without notice.The use of our liquidity simulator tool is granted to you for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. Our Allianz Trade liquidity simulator tool should not be reproduced and its outputs should not be disclosed without our consent. Given that this tool uses assumptions which are simplified versions of business reality, it is only intended as an illustrated example showing the potential impact of a range of predefined factors. We make no representation nor warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Our tool’s features are subject to change without notice.

How to protect your liquidity position?

Bad debts and write-offs have a negative impact on your cashflow and liquidity. So it's important to get your debtor management in order.

To protect your cash flow, it's also important to choose the right customers. Before doing business with a new customer, always check their creditworthiness, payment behaviour and financial situation.

There are also ways of protecting yourself against these debtor risks. For example, our credit insurance can help your company to protect itself against credit risks and thus ensure the growth of your business.

Would you like a non-binding discussion about your cash flow situation? Or would you like to find out whether credit insurance can help your business? Fill in the form below or click on the button below to find out more.

Why choose Allianz Trade?

62.000+
CLIENTS WORLDWIDE
83 million+
COMPANIES IN OUR DATABASE
AA rating
BY STANDARD & POOR'S

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