Course Question

Hi nzsurfgirl

I am not great on the academic lingo, but it seems to have to do with your cashflow. What you need to pay now/in the short term and what you have got in the way of assets to meet these obligations.
If I am right (which I might very well not be) that it is on cashflow you need to make sure that your current assets are always more than your short term liabilities or your business will die from money starvation. I would say that you use the ratio, on a graph/spreadsheet perhaps, to plot where you are on a daily, weekly or montly basis. You will then be able to forecast if you will have enough cash, or if you will need to find more (by making more sales, chasing payment on invoices due, issuing shares or raising debt funding from the bank).
It might be that they count other things but cash in the bank into current assets, you will need to look up their definition. But it is really only cash in the bank that will give you a healty cashflow. I suppose you better check their definition of short term liabilities as well.

Anna
Moderator, flyingstartups.com

I have had another think on this one and I think the timespan of the terms are longer than the immediate cashflow. Does anyone know a bit more about accounting & could explain this better? (and correct any mistakes I have made above!!!)
Anna
Moderator, flyingstartups.com

hi sorry for a very slow reply found some old engineering business management notes the raio is know as the "current ratio"

the next bit i nicked from a web site:

http://sbinfocanada.about.com/od/management/a/3ratios.htm

1) Current ratio

The current ratio is an excellent diagnostic tool as it measures whether or not your business has enough resources to pay its bills over the next 12 months. The formula is:

Current ratio = Current assets/Current liabilities

Recall that Current assets are a category of assets on the balance sheet that represent cash and assets that are expected to be converted into cash within one year.

Dave

Current liabilities are a category of liabilities on the balance sheet that represent financial obligations that are expected to be settled within one year.

For instance, suppose a business has $8,472 in current assets and $7200 in current liabilities. Then the current ratio is $8,472/$7200 = 1.18:1.

So for this business, the current ratio gives a clean bill of health. For every dollar in current liabilities, there is $1.18 in current assets.

A current ratio of over 1 is good news, generally, although if you are comparing your current ratio from year to year and it seems abnormally high, you may have problems with collecting accounts receivable or be carrying too much inventory.

sorry its so late hope it helps some one!

Dave