How to Calculate Current Ratio of a company is one of the very basic questions that we face in financial accounting. Basically it is a parameter which helps the general people and specially the lenders to decide whether the concerned company or a business would be able to pay its debt at end of the current financial period or not.
Current Ratio is calculated by dividing the Total Current Assets by Total Current Liabilities. Let us suppose that the financial experts of a region have defined a minimum Current Ratio value of 1.5 and the ratio of XYZ Company is around 1 then it should be able to face following immediate challenges.
The Lenders can immediately call for the payment leaving company with no option other than to be declared bankrupt or the lenders can take over the company. However, the intelligence of accountants or business people can avoid these problems by doing certain things regarding assets, liabilities and cash.
First of all, a company can launch a massive program needed to boost up the sales which means that a healthy cash inflow would be recorded increasing the value of total current assets. With this increase, we can keep the current ratio above 1.5.
Similarly, paying your liabilities would record a decrease in both total current liabilities and total current liabilities because cash would be used to pay them. However, the decreasing effect would be greater on the denominator and low on the numerator.
Last but not the least, the efficiency of accountant can make a difference too. Just in case if any emergency arises, a company can convert its long terms assets I.E Long term investments to be declared current assets and thus its value would be increased. This would result keep the current ratio value around 1.5 or maybe even above that.
Current Ratio of a company is really important aspect for accountants to take care of an it needs attention on daily basis because it’s really difficult to get the ratio back up there when it falls down. So rather than doing efforts like the ones mentioned to increase the ratio, it’s better for accountants and business people to pay the due attention towards it.