Liquidity and profitability are two of your business’s most important key performance indicators. In their own way and together, they demonstrate whether your business currently is or can be successful and they indicate your potential for growth and sustainability. Your liquidity has an impact on your profitability and your profitability will have an impact your liquidity—so while the two are not one-in-the-same, they do go hand in hand.
Simply explained, liquidity measures the time and ability it takes to convert your assets, such as accounts receivables, into cash to manage immediate and short-term financial obligations and/or emergencies. It is calculated by a set of liquidity ratios, most commonly the Current Ratio, Quick Ratio, and Cash Ratio. Profitability is how well your business is actively generating financial revenue relative your business size, calculated by profitability ratios such as profit margin ratios, operating margins/operating ratios, asset return ratios as well as Return on Equity and Return on Investment. Both are measures to help business owners to assess and analyze their ability for growth and sustainment.
Having adequate or high liquidity does not mean a business is profitable – it simply means there are enough assets to sufficiently cover immediate and short-term expenses. And even if your business is profitable, that does not necessarily mean you are adequately managing your current financial obligations. It can come as a complete shock to some business owners to realize that a company that is profitable can experience a financial crisis and may not be positioned for long-term growth, or even have enough liquidity to cover short-term financial obligations.
Understanding how to leverage liquidity and profitability to evaluate and improve your business is a critical piece of effective financial analysis. While most business owners will pore over their company’s financial statements, which is a good start, it’s not enough to adequately assess and forecast performance. It also leaves you to make decisions based on your finances alone, so you’re essentially using your business as a test subject for improvement scenarios that may or may not pan out. And when you’re only looking at your numbers, you not getting the big picture.
You can’t afford to make a mistake that could cost you your business. That’s why you need to invest in financial analysis software that dives into your current financials, compares them with key performance metrics and indicators across your industry and competitors, and forecasts flexible scenarios for improvement.
That’s where we come in. IndustriusCFO’s analysis engine can help you accurately assess where you stand today, and help you save your business before it needs saving. As a leading provider of data services and business intelligence solutions, we provide the largest and most reliable financial and industry peer benchmarking database available on the market today.
We actively help business owners make better business decisions with innovative data and analysis that is current, relevant, easy-to-access and applicable for assessing business performance and making improvements for short and long-term sustainable growth.
Analyze your liquidity position and profitability using our innovative and proprietary Liquidity Analysis, diving deeper than common liquidity ratios, helping you determine your business’s working capital needs while offering ways to improve cash sufficiency with “what-if” scenarios. Our Profitability Analysis analyzes performance and offers potential scenarios designed to help improve your business’s performance and standing compared to your industry peers, likewise using innovative measures. And with our Business Performance Scorecard, you can review a snapshot of your company’s financial state, including liquidity, profitability, efficiency, and growth, compared to your industry peers and competitors. IndustriusCFO helps you keep your fingers on the pulse of your financial performance, while understanding the financial impacts of your operational decisions and “what-if” scenarios.
With the most thorough and current financial analysis and industry data at your fingertips, we put the power in your hands to ensure you have adequate liquidity, and that your business is positioned to be as profitable as possible well into the future.