Answer to Question #134452 in Finance for Josephine

Question

If the balance sheet of a business shows positive equity, but is short on cash, but has a large accounts receivable balance, what would you suggest to the owner to ensure that the company can pay its liabilities on time?

Answer 1

What the owner should do to ensure that the company pays its liabilities on time is by checking the company's liquidity levels if it has a negative book value. To quickly check on the liquidity one should subtract the short term assets by the short term liabilities. This means that it is the calculation of the working capital which shows how much money has readily available to pay its upcoming bills. Some important ratios that can help in quickly assessing the liquidity are; quick ratio, current ration and the working capital turnover.