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The owner of a small merchandising business that sells supplies to commercial plumbers keeps finding herself...

The owner of a small merchandising business that sells supplies to commercial plumbers keeps finding herself scrambling to make payroll. She is confused as to why she runs short on cash. Her bookkeeper produces a monthly income statement and it regularly shows sufficient profits to pay her bills and make payroll. She asks you for advice and provides you monthly income statements for the last year and a current balance sheet. What financial ratios or analysis would you use to help uncover her ability to meet her monthly payroll?

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It's not necessary that the profits are always encashed. So even if profit is seen in books, cash might not be available. Therefore it's important to find out the liquidity ratio of the business. Under liquidity ratio, cash ratio should be used so as to know how much the business can pay it's current liability through available cash and marketable securities. The business should also analyse the application of profits.

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