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Write a summary about how can we improve our assement of liquidity by using the cash...

Write a summary about how can we improve our assement of liquidity by using the cash cycle of a firm?

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Answer #1

Cash cycle highlights the vital aspects of liquidity which is missing in static analysis of liquidity by current ratio and quick ratio. These ratio's, no doubt are very easy to compute but they are not able to determine the actual time taken for conversion of current assets to cash or time taken to pay current liabilities.

Cash cycle explains the time taken to covert the current assets and current liabilities into cash inflow and outflow vice versa. Furthermore, cash cycle is not calculated at a particular point of time as current ratio and quick ratio.

Last but not least, other methods of determining liquidity like current ratio's are easy to manipulate. On the other hand, cash cycle is not easy to twist.

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