Strategies to Improve Liquidity Ratios

Koala Koffee Co. — three months later

After the last board meeting, management switched to a cheaper supplier and bulk-bought inventory to reduce COGS. Profitability improved — but the finance director has raised a new concern. Cash is tight, debts are due soon, and too much money is tied up in unsold stock. The board needs to understand the liquidity position.

Statement of Financial Position — extract

Cash — in the bank account	$40,000
Trade Receivables — owed by customers	$50,000
Inventory — stock from the bulk buy	$110,000
= Current Assets	$200,000
Trade Payables — owed to suppliers	$85,000
Short-term Borrowings — bank overdraft	$45,000
= Current Liabilities	$130,000

Current Ratio —

$200,000 ÷ $130,000

target 1.5

Acid Test Ratio —

($200,000 − $110,000) ÷ $130,000

target 1.0

How should the board fix this?

Run a clearance sale — sell 50% of inventory for cash

Chase receivables — collect $30,000 owed by customers

Negotiate longer payment terms with suppliers

Use cash to pay off the bank overdraft

Sale and leaseback — sell equipment for $40,000 cash

Toggle a strategy to see how it changes the balance sheet above. The explanation will appear here.