Knowing current liabilities is helpful in providing insights into the financial health of your business. The current ratio measures a company’s short-term liquidity and is simply calculated using the following equation:
Current ratio = Current assets/Current liabilities
When the current ratio is less than 1, it shows that current liabilities exceed current assets, showing that the company will have trouble paying what you owe. When the number is greater than one, you should be able to cover what your business owes in the short term. If the number is too high, it can be a sign that the business is not effectively using its current assets or short-term liabilities.
Current liabilities and the current ratio are an important consideration for business lenders as they are an indicator of the financial position of a business.
When a business is in a position where current liabilities exceed current assets, it’s likely that the business has cash flow challenges. Business loans from Moula are one option for overcoming short-term working capital shortages.
