Understanding Your Financial Position Through Numbers
Most business owners I've worked with have a gut feeling about whether they're doing okay financially. But gut feelings don't satisfy lenders or help you sleep better at night when cash gets tight.
Liquidity and solvency analysis turns vague anxiety into concrete understanding. When you know exactly where you stand, planning becomes possible instead of just hoping things work out.
Discuss Your Situation
What These Numbers Actually Tell You
Liquidity measures whether you can pay bills that are due next month. Solvency looks further out—can your business survive the next two years if conditions stay roughly the same?
I remember working with a café owner in Fitzroy who thought they were struggling. Their liquidity ratios showed they were actually fine short-term, but solvency analysis revealed a equipment replacement crisis coming in 18 months. We had time to prepare rather than scramble.
That's the point really. These aren't academic exercises. Current ratio, quick ratio, debt-to-equity—they sound boring until they show you a problem you can still fix or an opportunity you didn't know existed.
Four Ratios Worth Watching
You don't need to track everything. Focus on these and you'll catch most problems before they become emergencies.
Current Ratio
Divide current assets by current liabilities. Above 1.5 means you probably won't panic about payroll next month. Below 1.0 means you need a plan yesterday.
Quick Ratio
Like current ratio but excludes inventory. More honest for businesses where stock doesn't move fast. If this drops below 0.8, start conversations with your bank before they start conversations with you.
Debt-to-Equity
Shows how much you owe versus what you own. High ratios aren't automatically bad—depends on your industry. But above 2.0 means every business decision carries extra weight.
Interest Coverage
Can you afford your loan payments from operating profit? Below 2.5 and you're vulnerable to any revenue dip. Most lenders get nervous around 1.5.
Who Looks at Your Numbers
Analysis doesn't happen in a vacuum. Different people care about different ratios for different reasons.
Dermot Flannery
Senior Analyst
Banks want to see liquidity above 1.2 and consistent interest coverage before they'll consider expansion loans. I've seen profitable businesses denied funding because their quick ratio dropped temporarily. Timing matters when you need capital.
Vasilis Papadopoulos
Advisory Consultant
Suppliers check your ratios more often than you'd think, especially before extending payment terms. And if you're looking to sell eventually, buyers will dissect five years of solvency trends. Better to know what they'll find before they find it.