Cash Ratio

What’s Cash Ratio?

In an accounting world, the term “Cash Ratio” carries paramount importance, as it is the ratio comprised of the overall cash and elements that are equivalent to cash after deducting the short-term liabilities from the business. Furthermore, it emphasizes on the potential of a certain organization for clearing off the short-term debts. It is worth mentioning that the information which disperses after proceeding with the “Cash Ratio” benefits the creditors in various cases, especially if an organization needs to extend the dead line for clearing off the debts.

What’s The Reason?

It should be in our best interest that the “Cash Ratio” is used to evaluate the total liquidity of the company and the possibilities behind clearing off the short-term liabilities either through cash in hand or liquidating elements that are as bankable as the cash. In addition, if a certain company decides to clear off its short-term debts through the “Cash Ratio” then, it is assumed that such entities are no longer required to sell off their assets or liquidate other business instruments to make the ends meet.

How Is It Useful For The Companies?

It has been evaluated by the accounting experts and finance gurus that cash-ratio benefits the companies with its usefulness, especially when we compare our percentage with the fellow competitors or the companies that are happen to be in the same industry.
It should be in our best interest that if the cash ratio is below the value of “1” then it highlights that a certain company is not in a suitable position to clear off the short-term debts as this is a financial instability. Furthermore, if the value is beyond “1” then a higher cash ratio emphasizes over the inefficiency of using maximum amount of cash for enhancing the business outputs, which is as alarming.